What happens to earnings-per-share (EPS) when two companies in a Mergers and Acquisitions deal combine?

In a Mergers and Acquisitions context, the impact on earnings-per-share (EPS) can vary significantly depending on the structure and specifics of the deal. When two companies merge or when one acquires another, the immediate effect on EPS depends on several factors including the purchase price, the earnings of both companies, and how the deal is financed.

In scenarios where the buyer uses cash or debt financing to acquire the target, the cost of that financing can affect the earnings available to shareholders. If the acquired company does not generate enough earnings to offset the cost of the acquisition, or if the acquisition leads to increased expenses (such as integration costs or higher interest expenses), the overall EPS for the buyer may decline. This is especially true if the buyer was previously more profitable compared to the target.

In a scenario where an acquisition dilutes existing shares, or if the earnings contribution from the acquired company is lower than anticipated, the overall effect can be a decrease in EPS for the buying company. This is likely what is meant by the right answer indicating a decrease in EPS for the buyer in this context.

Thus, recognizing the nuances of how proportions and share counts interact during a merger or acquisition is crucial for understanding these financial metrics.