What is one factor that might contribute to an acquisition being considered dilutive?

What is one factor that might contribute to an acquisition being considered dilutive?

• A. Amortization of intangibles
• B. High purchase price of the target
• C. Decline in stock price post-acquisition
• D. Immediate realization of synergies

Answer: (A)

The correct answer highlights that amortization of intangibles can have a significant impact on the financial metrics used to assess an acquisition. When a company acquires another, it often pays a premium that can lead to the recognition of intangible assets such as trademarks, customer relationships, or goodwill. These intangible assets are typically amortized over their useful lives, which can result in additional non-cash expenses on the income statement. As these amortization expenses are recognized, they reduce the acquiring company's earnings. If the reduction in earnings outpaces any increase in revenue or synergies generated from the acquisition, the overall effect can be a decrease in earnings per share (EPS), rendering the acquisition dilutive. This scenario might particularly occur if the acquisition price is high relative to the expected financial benefits, amplifying the dilutive effect of amortization. In contrast, while the other options deal with various aspects of acquisitions, they do not inherently lead to dilution in the same substantial way that amortization of intangibles can. For instance, a high purchase price can certainly lead to dilution if not supported by earnings growth, but it’s the amortization that directly impacts earnings calculations. Similarly, a decline in stock price post-acquisition may reflect market sentiment and future expectations but

The correct answer highlights that amortization of intangibles can have a significant impact on the financial metrics used to assess an acquisition. When a company acquires another, it often pays a premium that can lead to the recognition of intangible assets such as trademarks, customer relationships, or goodwill. These intangible assets are typically amortized over their useful lives, which can result in additional non-cash expenses on the income statement.

As these amortization expenses are recognized, they reduce the acquiring company's earnings. If the reduction in earnings outpaces any increase in revenue or synergies generated from the acquisition, the overall effect can be a decrease in earnings per share (EPS), rendering the acquisition dilutive. This scenario might particularly occur if the acquisition price is high relative to the expected financial benefits, amplifying the dilutive effect of amortization.

In contrast, while the other options deal with various aspects of acquisitions, they do not inherently lead to dilution in the same substantial way that amortization of intangibles can. For instance, a high purchase price can certainly lead to dilution if not supported by earnings growth, but it’s the amortization that directly impacts earnings calculations. Similarly, a decline in stock price post-acquisition may reflect market sentiment and future expectations but