Case 2 Big Time Corp.’s sales increase by 8.0 percent between Year 1 and Year 2.

Small Change, a smaller, privately owned company in the same industry, also achieves 8.0 percent year-over-year sales growth. Suppose now that at the end of Year 1, Big Time acquires Small Change with shares of its own stock. The Big Time income statements under this assumption (“Acquisition Scenario”) show a percent sales increase between Year 1 and Year 2.

On the face of it, a company growing at percent a year is sexier than one growing at only 8.0 percent a year. Observe, however, that Big Time’s profitability, measured by net income as a percentage of sales, does not improve as a result of the acquisition. Combining two companies with equivalent profit margins of percent produces a larger company that also earns percent on sales. Shareholders do not gain anything in the process, as the figures below demonstrate.

If Big Time decides not to acquire Small Change, its number of shares outstanding remains at 125.0 million. The earnings increase from _______$ million in Year 1 to $_______ million in Year 2 raises earnings-per-share from $ to $ _______. With the priceearnings multiple at 16 times, equivalent to the average of the company’s industry peers, Big Time’s stock price rises from $_______ to $_______ a share.

is worth $ a share, precisely the price calculated in the Non-
Acquisition Scenario.
The mere increase in annual sales growth from 8.0 percent to percent has not benefited shareholders, whose shares increase in value by percent whether Big Time acquires Small Change or not.

Acquisitions Driven by P/E Multiples Big Time Corp. and Small Change Inc. Debt $1,000.0 32.0 $1,000 Equity $1,000.0 25.0 $1,000 Big Time Annual Coupon Rate for Debt 10% Small Change Annual Coupon Rate for Debt 15% ($000.000) Omitted Acquisition Non-Acquisition Scenario Scenario Big Time Corp. Small Change Inc. Big Time Corp. Year 1 Year 2 Year 1 Year 2 Year 1 Year 2 Sales $5,000.0 $238.1 $5,000.0 Cost and Expenses Cost of Goods Sold 3,422.7 160.6 $3,422.7