Acquiring firms with higher PE ratios

Research output: Contribution to journalArticle

Abstract

The paper disproves the general belief that one should not acquire companies with a higher PE ratio than one's own under a stock exchange, since it would dilute the acquirer's earnings per share. It develops new models for calculating the earnings per share and share value for acquirer's shareholders allowing for partial acquisitions and synergistic effects. It then determines the maximum PE multiple that the acquirer can pay that will neither dilute the share value nor the projected earnings per share. It also establishes that the maximum PE multiple one can pay in either case is highest when only a majority of shares is acquired. The condition for the maximum PE multiple to be greater than the acquirer's PE ratio is also derived. A bargaining range for the PE multiple is determined too.

Original languageEnglish (US)
Pages (from-to)96-102
Number of pages7
JournalLong Range Planning
Volume21
Issue number5
DOIs
StatePublished - Oct 1988

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Finance
  • Strategy and Management

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