What is a potential drawback of enhancing pro forma earnings per share by borrowing more money in Mergers and Acquisitions?

Enhancing pro forma earnings per share by borrowing more money can indeed lead to an implied higher bankruptcy risk. When a company takes on additional debt to finance a merger or acquisition, it increases its fixed financial obligations. If the newly combined entity fails to generate sufficient earnings to cover these debt payments, the risk of default rises significantly.

An increase in financial leverage can amplify returns on equity during prosperous times, but it can also magnify losses and lead to cash flow issues during downturns. Investors often view such high levels of debt as a red flag because the company's ability to handle financial commitments amid adverse market conditions becomes precarious. As a result, high leverage can affect credit ratings, raise borrowing costs, and diminish investor confidence, potentially impacting long-term value creation.

Given these dynamics, the acknowledgment of a higher bankruptcy risk is crucial for understanding the implications of leveraging debt in M&A scenarios. This risk reflects how the combination of increased debt and the need to maintain operational stability can strain a company's financial health.