New Jersey Business Acquisitions: Basics of a Leveraged Buyout

Video Transcript 

My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.

For many, many years, our firm has worked in leverage buyouts and acquisitions. It's been a big part of our practice since the early 80s. I'm just going to go through, quickly, how we look at mergers and acquisitions. Here we have the acquirer, the target, and this is the pro forma statement, after we do the acquisition. But in this case, I'm assuming the stock price for the acquirer is $25, and the target is $60. The PE's $10, over here it's $12. Earnings per share is $250 for the acquirer, target is $5 dollars. Outstanding shares are $4,000 for the acquirer and the target is $1,000. Then, income is $10,000 for the acquirer and the target is $5,000.

Now, what we try to do is figure out, once we acquire this company, is it going to be dilutive or accretive? Because we don't wanna buy a company that's gonna actually reduce our earnings per share which, unfortunately, happens in 60% to 70% of the cases. But to simplify this, what we call a back of a napkin, what I'll do when I meet with a client initially is we'll figure out, well, their company's worth $60 million. It's $60 a share for, you know, 1,000 shares or a million shares outstanding, so it's worth $60 million. We're gonna have to issue 2,400 shares of ours at $25. And I know I'm going quick, but you can think this through and write it out. So I know I'm gonna issue 2,000,400 shares in order to acquire that company, because we have to pay $60 million. Let's just drop the zeros, let's say it's $60,000. But here's our earnings per share before, ours were $250 and theirs was $5, right? Now we issued another 2,400 shares, so now we have 6,400 shares, but the net income is still $15,000.

So, what does that mean for this company? It means that our earnings per share is gonna drop to $234. So, here we just acquired a company and we've reduced our earnings per share, which is not what we wanna do. Hopefully, when we're gonna go through with an acquisition, we have some kind of cost savings and operation expenses, or something like that, then our earnings per share is not gonna go down. And remember, this is not only for public companies, this is for private companies. We do the same thing, and 80% of our work is for privately-held companies. But you still wanna understand, are you going through this acquisition just to keep management busy or are you actually looking to improve the company? And if you can't tell me, or if we can't tell you, that our earnings per share is going up, it's probably just an activity to keep people busy, which is not what you really wanna do. You're better off not doing the acquisition. And these projections, they're complicated, but they give you a lot of good information so that you can make intelligent choices. But in the end, it always comes down, is it dilutive? Is it accretive? You need to know that. If you have any questions on this, let me know.