What is the outcome if the pro forma EPS is lower than the acquirer's standalone EPS after a deal?

When the pro forma earnings per share (EPS) is lower than the acquirer's standalone EPS after a merger or acquisition, it indicates that the acquisition may negatively affect the financial returns for shareholders. This situation suggests dilution, where the combined earnings allocated to each share are reduced compared to what shareholders would have received if the acquirer operated independently.

Dilution occurs when the new shares issued for the acquisition or the decrease in earnings per share leads to a lower value per share than previously held. Consequently, shareholders may not see the expected benefits of the acquisition, such as increased earnings or improved market positioning, which can lead to dissatisfaction among investors and potential negative reactions in the market.

In this scenario, understanding the implications of lower pro forma EPS is crucial because it highlights the importance of careful assessment in M&A deals, especially regarding how they impact shareholder value. If pro forma EPS reduces confidence in the deal, it could reflect poorly on both the acquirer’s management and the strategic rationale behind the acquisition.