In an all-stock deal, what happens if the buyer's P/E ratio is higher than the seller's?

• A. The deal will be dilutive
• B. The deal will be neutral
• C. The deal will be accretive
• D. Shareholders will receive cash

Answer: (C)

In an all-stock deal, when the buyer's price-to-earnings (P/E) ratio is higher than that of the seller's, it typically results in an accretive transaction for the buyer. This occurs because the buyer, with its higher P/E ratio, is using its relatively more valuable stock to purchase the seller's less valuable stock.

In this scenario, the earnings generated by the seller are being bought at a lower valuation compared to the buyer's existing valuation. As a result, the earnings per share (EPS) of the combined entity after the deal closes are expected to increase, meaning the buyer's shareholders will benefit from an increase in their share value, rather than experiencing a dilution of their ownership or a neutral effect on their earnings.

Thus, in circumstances where the buyer’s P/E ratio exceeds that of the seller, the transaction enhances the financial position of the buyer’s shareholders, making it an accretive deal.