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Maximizing Earnings Per Share in an Acquisition

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Suppose XYZ Corporation's stock is trading at $50.00 per share while ABC Corporation's stock is trading at $25.00 per share. XYZ has earnings per share (EPS) of $1.00 while ABC has EPS of $2.50. Currently neither company has debt, and each has 1,000,000 shares of stock outstanding.

If the merger takes place based on an exchange of stock (based on market value), which company should be the acquiring firm in order to see an increase in EPS?

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Solution Summary

This solution analyzes the impact of earnings per share depending on which of the two companies is the acquiring company. Which company should be the acquiring firm in order to see an increase in EPS is determined.

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The expected earnings for XYZ are $1.00 per share * 1,000,000 shares is $1,000,000. The expected earnings for ABC are $2.50 per share * 1,000,000 shares is $2,500,000. The expected earnings for the combined company is $1,000,000 + $2,500,000 = $3,500,000.

Assume that XYZ can acquire ABC for stock in an exchange based on market value. ...

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