Quick Answer
The seller's banker evaluates each buyer proposal across strategic and financial dimensions: ability to pay, strength of buyer's currency in a stock deal, accretion/dilution analysis of buyer earnings per share (EPS), synergies, social issues (governance, executive roles, headquarters), and regulatory sensitivity. The accretion test for an all-stock deal: the deal is accretive (ignoring synergies) if the acquirer's price/earnings (P/E) ratio is higher than the target's P/E ratio.
A buyer's bid is more than a headline price. The banker evaluates each proposal against multiple lenses so the seller can compare apples to apples: cash versus stock, certain-financing versus speculative, accretive versus dilutive, and high-fit versus low-fit.
Strategic and Financial Evaluation Lenses
The seller's banker evaluates each buyer proposal across two dimensions: strategic questions (qualitative fit and capability) and financial questions (quantitative impact on buyer and seller).
| Lens | Strategic Questions | Financial Questions |
|---|---|---|
| Buyer ability to pay | Has the buyer closed comparable deals? Track record? | Cash on hand, leverage capacity, committed financing |
| Strength of buyer's currency (stock deals) | Is buyer stock highly valued by the market? Liquid? Acquirer trading at a premium multiple? | P/E ratio vs target; stock-price volatility; daily trading volume; pro forma ownership for sellers receiving stock |
| Accretion/dilution analysis | Will the deal increase or decrease buyer EPS? | Pro forma EPS calculation (see the formula and drivers below) |
| Synergies | Cost synergies (headcount, footprint, IT, procurement); revenue synergies (cross-sell, channel expansion); financing synergies (refi target debt at acquirer's lower rate) | Net synergy contribution to pro forma EPS, after integration costs and tax |
| Social issues | Board composition post-close; CEO role; headquarters location; brand survival; employee terms | Equity awards, retention pools, severance / change-of-control payments |
| Regulatory / antitrust sensitivity | HSR Second Request risk; CFIUS exposure; foreign-merger reviews | Probability of approval; conditional remedies (divestitures) demanded |
Strength of the Buyer's "Currency"
In a stock deal, the seller's shareholders receive acquirer stock as consideration. The quality of that stock as a store of value is the buyer's currency strength.
Stronger currency:
- Large public acquirer with high trading multiple
- Liquid float
- Strong analyst following
- Low volatility
- Stable strategic story
Weaker currency:
- Thinly traded
- Recent IPO (limited trading history)
- High leverage
- Declining business
- Speculative or controversial strategic story
Why it matters at the negotiating table:
- Sellers receiving stock from a weak-currency acquirer demand a higher exchange ratio (more shares per target share) to compensate for the consideration risk
- A higher exchange ratio drives up share dilution and may push the deal from accretive to dilutive
- Sellers may insist on cash instead of stock from a weak-currency acquirer; the buyer then has to raise the cash or lower the price
Exam Tip: Gotchas
- "Strength of currency" is a Series 79 outline term for the quality of acquirer stock when used as M&A consideration. A weak-currency acquirer must offer a higher exchange ratio (more shares per target share) to compensate sellers, driving up share dilution and risking a dilutive deal.
Accretion/Dilution Analysis
The accretion/dilution analysis compares pro forma EPS (post-deal) to standalone acquirer EPS (pre-deal).
- Deal is accretive if pro forma EPS > standalone EPS
- Deal is dilutive if pro forma EPS < standalone EPS
Pro forma EPS Formula
Pro forma Net Income components:
- Acquirer net income (NI)
- Plus: Target net income
- Plus: After-tax synergies
- Less: After-tax incremental interest expense (new debt to finance the deal)
- Less: After-tax foregone interest income (cash used to finance the deal)
- Less: Incremental depreciation and amortization (D&A) from asset step-up (if applicable)
Pro forma Shares Outstanding components:
- Acquirer shares
- Plus: Newly issued shares (stock consideration)
Key Drivers
- Relative price/earnings (P/E) multiples: A buyer with a higher P/E than the target is generally able to do an accretive stock deal at a no-premium price
- Financing mix: Cash means interest forgone (or new interest expense); debt means interest expense; stock means share dilution
- Synergies: The most impactful single lever; large synergies can turn a dilutive structural deal into an accretive one
- Tax shield from goodwill amortization: Available in asset deals and stock deals with the deemed-asset-sale election
Quick Accretion Rules
For a cash deal:
- Approximately accretive if the target's earnings yield (earnings/price, or E/P) is greater than the after-tax cost of financing the purchase price
- A debt-financed cash deal is more accretive than a stock deal only if the after-tax cost of debt is less than the earnings yield of the target
For an all-stock deal (ignoring synergies):
- Approximately accretive if the acquirer's P/E is HIGHER than the target's P/E
- Approximately dilutive if the acquirer's P/E is lower than the target's P/E
Think of it this way: in an all-stock deal at no premium, the acquirer is "buying" target earnings using its own equity. If the acquirer's stock trades at a higher P/E than the target's stock, every dollar of target earnings the acquirer buys translates into more pro forma EPS than the acquirer is giving up by issuing shares. The deal is accretive. If the relationship reverses, the deal is dilutive. Synergies and premium shift this; the rule applies cleanly only at no premium and no synergies.
Exam Tip: Gotchas
- A stock deal at the same valuation is LESS accretive than a cash deal because of share dilution. Cash deals avoid issuing new shares; stock deals add to the denominator of EPS.
- The simple all-stock accretion rule (acquirer P/E > target P/E) IGNORES synergies and premium. A 30% control premium and zero synergies will turn an otherwise accretive structural deal into a dilutive one. The exam's "quick test" question is asked at no premium and no synergies.
- A debt-financed cash deal is more accretive than a stock deal ONLY IF the after-tax cost of debt is less than the earnings yield (E/P) of the target. Otherwise, the interest expense on the new debt eats into the EPS gain.
Social Issues
The FINRA outline explicitly calls out "social issues" as an evaluation dimension. Social issues are the non-financial features of the deal that affect post-close governance, executive treatment, and brand.
Standard social issues:
- Post-close governance: Board composition (how many seats does the seller get?), independent vs combined chairman, lead director arrangements
- Executive roles: Will the seller's CEO stay? In what role? With what compensation?
- Board seats: Number of seats the seller's representatives hold post-close
- Headquarters location: Will the combined company relocate or split functions?
- Employee benefits: Will the seller's benefit plans survive? At what level?
- Retention packages: What's available for key employees?
- Severance / change-of-control payments: What triggers and what amounts?
Why social issues matter:
- For a strategic acquisition, social issues can drive deal acceptance even when financials are close; a board may pick a slightly lower bidder that preserves headquarters and brand
- Founder-led companies often weigh social issues heavily; cash maximization is not the only goal
- Cross-border deals with cultural differences put extra weight on social-issue clarity
Exam Tip: Gotchas
- Social issues can be deal-breakers even when price is acceptable. A founder who wants the company headquartered in his hometown may reject a higher bid that moves headquarters elsewhere.