Mergers, Acquisitions, Divestitures, and Other Restructurings, + Website

Chapter 5Accretion/Dilution Analysis

Now that we have a general understanding of the flows behind a simple asset acquisition and simple asset divestiture, we can apply the concepts toward a complete combination of two entities. Remember, in a simple asset acquisition, funds are expended, and the PP&E is increased by the value of the asset purchased. But in an acquisition of an entire business entity, more than just the core PP&E is acquired. When purchasing a business entity, one is effectively taking into consideration the entire balance sheet, the value of which is indicated by the total assets less the total liabilities, or the shareholders' equity. So, where in a simple asset acquisition the price paid represents the net asset value (typically at a premium), the price paid for a business entity represents the shareholders' equity (typically at a premium). So, in a merger or acquisition of a business entity, we are effectively buying out shareholders' interest in the target business, represented by its shareholders' equity: we are using funds to buy out the target shareholders, and so those shareholders go away, and so does the shareholders' equity on the balance sheet.

Note

I am making an oversimplification of the “acquisition of asset” structure solely to illustrate the core mechanical difference from an “acquisition of equity”. There are many variations of each structure where one may look more similar to the other.

To better illustrate this let's discuss the process: ...