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Technology Stocks : Marvell Technology Group {MRVL} -- Ignore unavailable to you. Want to Upgrade?

To: mike thomas who wrote (40)	11/16/2000 6:43:29 PM
From: Howard Bennett	Respond to of 162

Should have known Something was fishy here. A high P/E company takes over a low P/E company. MRVL is using it's stock to buy real accretive earnings. ----------------------------------------------- Accretive and Dilutive Mergers Mergers are popping up like crocuses in spring. Companies interviewing MBAs for internships want to make sure that they know their M&A. Whether you're interviewing for a finance position in a high-tech firm or an investment bank that works with Internet stocks, you'd better be able to keep your mergers straight. Here's a quick way to determine if a merger is accretive or dilutive - a commonly-asked question in MBA finance interviews. A merger can be either accretive or dilutive. A merger is accretive when a firm with a higher price to earnings ratio (we'll call the company "Company 1," and label its P/E ratio "P/E1") acquires a firm of a lower P/E ratio (which we will label P/E2). Why do we call the merger accretive? The company's new earnings will be E1 + E2. Let's call this Enew. Usually, the new company will maintain the P/E ratio of the acquiring firm. Post-acquisition, it will be valued as P/E1 x earnings. However, the amount that Company 1 had to pay was only PE2 x E2. Hence it paid a lower price when compared to the additional valuation it received from the market due to the increased earnings. (Mathematically, this can be represented by P/E1 > P/E 2, P/E 1(E1 + E2)> P/E1(E1) + P/E2(E2)) Hence the word accretive. A simple way to memorize this is: "Accrete means to add. To add value." So if you pay less and receive more value, it is accretive. (Think of dilutive the other way - as diluting, or thinning out, value.) The reverse of this situation is a dilutive merger, and occurs when a company with a lower P/E ratio buys a firm with a higher P/E ratio. Here we use the term "buys" because the buying firm determines the final valuation multiple.