Forget EPS accretion and focus on value!
We happened upon a copy of Credit Suisse's "To Buy or Not To Buy" - 26 pages on M&A - a couple of years after it was published (Feb 2017) but found it compelling - particularly in relation to EPS accretion.
- Three quarters of investor relations professionals surveyed by AT Kearney said stakeholders place a “strong emphasis” EPS accretion or dilution - and that EPS accretion or dilution was deemed to be, by far, the most important metric.
- Most announced M&A deals today are accretive to the EPS of the buying company.
- But EPS accretion or dilution actually provides little or no insight because value creation is based on cash flows rather than accounting measures - and the cost of capital rather than the funding source.
Credit Suisse took a sample of 95 of the M&A deals, categorised them based on whether the company said it would be immediately accretive or dilutive to EPS, then reviewed the one-day abnormal return for the buyer on the day of the announcement .
The table below shows that:
- Roughly three-fourths of the deals had a neutral or negative impact on shareholder value.
- The bottom row reveals that 27 percent of the deals in this sample created shareholder value.
- The box in the upper right corner shows that almost half of the deals add to EPS but subtract from value!