U.S. Bancorp Piper Jaffray Middle Market
+ Mergers & Acquisitions – Analyzing Weekly M&A Activity – March 17, 2003
hFEATURE
Glenn A. Gurtcheff
ARTICLE
U.S. Bancorp Piper Jaffray will be publishing a technical research piece entitled "The Effect of an
Acquisition on Earnings per Share – Accretion/Dilution Analysis.”
An important consideration for many public companies in determining the acquisition consideration and
purchase price is the effect of an acquisition on earnings per share. This M&A Insights article will review
the reason that many public companies are concerned about the effect that an acquisition has on
earnings per share. Specifically, many public companies are concerned that an acquisition not be
dilutive to their earnings per share. The major reason for this is because of the potential effect it may
have on the purchaser’s share price. A simple example will highlight this concern. Assume that a
company’s stock trades at a price-to-earnings ratio of 25 times and the company has earnings per
share of $1. The company’s stock price would be $25. Assume that the company desires to make an
acquisition and expects that it will trade at a price-to-earnings multiple of 25 times subsequent to the
acquisition. If the acquisition is dilutive to earnings per share (i.e., earnings per share fall below $1), the
share price will fall below $25. On the other hand, if the acquisition is accretive, then the share price will
rise above $25. It should be noted that this simple example does not highlight the many factors that
result in the company’s stock trading at a different price-to-earnings multiple subsequent to the
acquisition. In addition, it is important to note that there are many analysts and investors who place
much more reliance on financial measurements other than earnings per share and the price-to-earnings
multiples.
The key considerations in determining whether a stock transaction is accretive or dilutive are the
acquirer’s price-to-earnings ratio and the price-to-earnings ratio that is paid for the incremental earnings
that are added as a result of the acquisition. Incremental earnings include the target’s after-tax earnings
increased by any synergies (adjusted for taxes) that result from the acquisition. If the price-to-earnings
multiple that is paid for the incremental earnings is lower (greater) than the purchaser’s price-toearnings multiple, the transaction will be accretive (dilutive). As an alternative to issuing stock, a
purchaser may issue debt and use the cash proceeds to finance the acquisition. If the additional
interest expense is less (more) than the pretax incremental earnings, the transaction will be accretive
(dilutive).
In conjunction with this article, U.S. Bancorp Piper Jaffray will be publishing a report entitled “Packaging
Industry Public Acquirers – Earnings per Share Accretion/Dilution Considerations.” If interested in
receiving the full report of either article, please contact Michelle Mudek at (312) 920-2158.
hDEAL
GlennOF
A.THE
Gurtcheff
WEEK
Jason Efthimiou 612.303.6375
Sylvan Learning Systems Enter Agreement with Apollo Management
On March 11, 2003 Sylvan Learning Systems (NASD: SLVN) agreed to sell eSylvan, its signature
tutoring centers business and its internet-based tutoring offshoot to Apollo Management, a New Yorkbased private equity firm, for a price estimated at $275 million to $300 million.
Industry analysts have praised the potential deal as a positive for current shareholders and enables
Sylvan to untangle its partnership with Apollo in Sylvan Ventures, whose losses were eroding
confidence and value in the parent company. In addition to providing simplicity and transparency to
Sylvan’s financials, the potential transaction enables Sylvan to focus entirely on running its six colleges
in Europe and Latin America and its online universities, Walden and National Technological University.
Sylvan’s higher-education operation is viewed to be more efficient and have greater long-term growth
potential than its sales-intensive tutoring unit in the U.S.
Sylvan will remain a publicly traded entity but with a new name and stock symbol in the coming year,
while the tutoring business will no longer operate as a publicly traded company. U.S. Bancorp Piper
Jaffray and Credit Suisse First Boston advised Sylvan Learning Systems while J.P. Morgan advised
Apollo Management.
Nondeposit investment products are not insured by the FDIC, are not deposits or other obligations of or guaranteed by U.S. Bank
National Association or its affiliates, and involve investment risks, including possible loss of the principal amount invested. Securities
products and services are offered through U.S. Bancorp Piper Jaffray Inc., member SIPC and NYSE, Inc., a subsidiary of U.S. Bancorp.
($ in Billions)
Week of 03/10/03
Calendar Year 2002
Value (1)
$ 3.2
$ 408.2
Volume
102
6,398
YTD 2002 vs. YTD 2003
1,500
$75
1,200
$60
900
$45
600
$30
300
$15
0
Value
An acquirer may finance an acquisition by issuing stock or debt, or using existing cash on its balance
sheet. In the case of stock, the purchaser may exchange its stock for the target’s stock or alternatively
issue equity to third parties (e.g., the public markets) and use the proceeds as acquisition
consideration. In recent years, cash has been used as the acquisition consideration in the majority of
transactions (approximately 60 percent). In evaluating whether the acquisition consideration used will
be stock or cash, the purchaser and the seller consider a variety of factors including: the effect on the
purchaser’s financial measures, access to financial markets, the quality of an investment in the
purchaser, whether the transaction will result in a tax deferral, and the desire of the seller to maintain a
continuing influence in the business.
DOMESTIC M&A TRANSACTIONS
Volume
Doug Lawson 312.920.2139
The Effect of an Acquisition on Earnings per Share –
Accretion/Dilution Analysis
$0
YTD 2002
Volum e
YTD 2003
Value
(1)
Total value based on deals with reported values
Source: Securities Data Corporation
LTM median deal value is up to $21.0 million in
2003 from $18.0 million in 2002.
LTM TRANSACTION MULTIPLES
By Size ($ in millions):
Less than $25
$25 to $100
$100 to $250
$250 to $1,000
Over $1,000
EBIT
7.8x
11.0x
12.5x
12.3x
13.1x
EBITDA
6.8x
8.6x
9.0x
9.3x
8.6x
* Based on multiples between 0x and 25x.
Public Company Premiums:
1 Week prior to announcement
4 Weeks prior to announcement
32.0%
35.3%
DEAL FINANCING
Leveraged Bank Loan(1)
High Yield Bond Rate
Senior Debt / EBITDA
Total Debt / EBITDA
Current
4.43%
10.58%
One Year Ago
5.19%
11.52%
2.9x
3.9x
2.7x
3.5x
(1)
Current data as of March 17, 2003
Source: Portfolio Management Data
BUYOUT FUNDS - $ IN BILLIONS
Funds Raised
Deals Completed
(1)
2003(1)
$0.9
$6.2
2002
$29.0
$43.9
2001
$36.9
$23.1
Current data as of March 17, 2003
For more information, contact Heather D. Goodwin
at hgoodwin@pjc.com