M&A: Earnings Per Share & The “Bootsrap” Effect

  • It can be possible, following a merger that the acquiring firm demonstrates earnings per share (EPS) growth, which is deceptive because no real synergies were ultimately realized.
  • For example, an acquiring company may nominally show a 50% post merger growth to EPS, even though shares outstanding increased by only 25%.
  • The illusion of economic value from gains to EPS growth is known as the “bootstrap” effect.  Well trained analysts will revise their price to earnings ratios in recognition of this valuation fallacy.
  • Candidates may be required to interpret a bootstrap M&A scenario on the exam, so it is advised to practice detailed problem examples to better understand the phenomenon.