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Finance allah shmoop what are at creative dilutive and neutral

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acquisitions All right people Well it's all about the multiples

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you work for boring co dot com You make stationery

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roller coasters for the faint of heart And you grow

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revenues at about ten percent a year All right well

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your stock trades at about twelve times earnings and you

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really want to buy your would be competitors Let's bounce

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dot com which makes concrete bounce houses Yeah they're made

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in russia What do you expect Unfortunately let's bounce has

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been growing revenues at about fifteen percent but because they

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make such a much more exciting than you do product

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people are really into inflicting pain on themselves these days

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Well they trade at thirty times earnings thirty years Fifteen

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they're thirty they're willing to be bought but they'll want

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thirty six times earnings for the privilege That is a

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twenty percent premium toe where they trade today And they

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only want stock no cash you know because the primary

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shareholders would all suffer a huge tax bill if they

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took cash so they'll only take stock Yours All right

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So this is a conundrum You traded a low multiple

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Twelve times your shareholders own you because you are a

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quote value story unquote meaning that your cheap but you

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are a low risk company Now if you try to

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buy a growth company and pay a high multiple for

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it well you risk alienating your shareholder base and that's

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bad like they'll sue you in elected Different forces will

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do different things but if you do buy let's bounce

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while the combination would be really powerful birthday parties everywhere

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would be a thrill a minute or something like that

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Well the problem is that a twelve times earnings company

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paying thirty six times earnings to acquire a competitors is

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dilutive to that twelve times earnings company That is the

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combined company If each piece were equal and they just

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merged as equals a mow their m o ya that's

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what they're called Well they would not have one Half

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of the combined company is being valued at twelve times

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earnings when it was a standalone company and then another

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piece valued at thirty times as a stand alone but

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combined at a price of thirty six times that's twelve

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plus thirty six or forty eighth and divided by two

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Companies combining here so the new company should the stock

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price is all remain flat at the proposed acquisition or

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merger Price set would be trading at twenty four times

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earnings and we're talking really slow so you could follow

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the map All right well the combination of born cohen

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let's bounce would have been diluted to boring co because

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it's multiple of twelve would've been diluted down via the

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high multiple paid for let's bounds and the combination would

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have been act creative too Let's bounce because now they're

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stock will traded around twenty four times earnings instead of

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thirty times earnings Right obviously had both companies traded the

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same multiple of earnings when they combined Well there'd be

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no dilution or at creation for either side and the

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merger would simply be called neutral sort of like someone's

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reaction to a roller coaster that neither rolls nor coasts

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Yeah it's sort of like doing these videos are just

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just keeping it real enough No we love doing good 00:03:14.905 --> [endTime] bye

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