Case 035M&A and corporate developmentHard

A freight company buys a shipping services business half in shares and half in debt, and purchase accounting creates Rs 600 crore of amortisable intangibles. Compute the cash and reported EPS impact.

Point72New York · 2025

The situation

Pathvahini Freight earns net income of Rs 300 crore on 30 crore shares, EPS of Rs 10.00, and its shares trade at Rs 150, a P/E of 15. It agrees to buy Samudrika Shipping Services, which earns Rs 80 crore, for Rs 1,200 crore, also 15x earnings.

Half the price is paid in new Pathvahini shares at Rs 150 and half with new debt at 8%. Tax is 25%. The purchase price allocation identifies Rs 600 crore of customer contracts and other intangibles, amortised over 10 years. The amortisation is not tax deductible.

Your task

What happens to Pathvahini's EPS before and after the amortisation, and which number should management show investors?

Quick check

Before any amortisation, does the deal add to or cut EPS?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Cash EPS rises about 1.2% to Rs 10.12; reported EPS falls about 16.5% to Rs 8.35. Combined earnings are Rs 300 crore plus 80 less Rs 36 crore of after-tax interest, Rs 344 crore, over 34 crore shares. Rs 60 crore a year of non-deductible amortisation then cuts reported earnings to Rs 284 crore. Show both, with the bridge between them, because investors will.

Step 1What is the deal's effect before accounting enters?

Run the cash numbers first. New shares: Rs 600 crore at Rs 150 is 4 crore shares, taking the count to 34. New debt: Rs 600 crore at 8% is Rs 48 crore of interest, Rs 36 crore after tax. Combined earnings before amortisation are 300 plus 80 less 36, Rs 344 crore, over 34 crore shares: Rs 10.12, up 1.2%. The yield check agrees: Samudrika earns 6.7% on its price and the half-shares, half-debt money costs 6.3%.

Step 2Where does the Rs 60 crore of amortisation come from?

From paying more than the target's book value. When you buy a business, its identifiable intangibles, such as customer contracts, are written onto the balance sheet at fair value and, where they have a finite life, expensed over it. Rs 600 crore of acquired intangiblesAssets such as customer contracts, brands or technology that are recognised at fair value when a business is bought, and amortised if they have a finite life. over 10 years is Rs 60 crore a year of expense that did not exist in either company before. Because it is not tax deductible, the whole Rs 60 crore reaches net income, which falls to Rs 284 crore: Rs 8.35 a share, down 16.5%.

Same deal, two EPS numbers: change against standalone Rs 10.000%-15%-10%-5%+5%+1.2%Cash EPS: Rs 10.12-16.5%Reported EPS: Rs 8.35Before amortisationthe deal adds to EPSAfter Rs 60 crore a yearof amortisation it cuts it
Pathvahini's EPS rises 1.2% to Rs 10.12 on a cash basis but falls 16.5% to Rs 8.35 on a reported basis once Rs 60 crore a year of acquired intangibles are amortised.
Rs croreStandalonePro forma, cashPro forma, reported
Pathvahini earnings300300300
Samudrika earnings8080
After-tax interest on Rs 600 crore(36)(36)
Amortisation, not deductible(60)
Earnings300344284
Shares, crore303434
EPS, Rs10.0010.128.35
Before amortisation Pathvahini's EPS rises from Rs 10.00 to Rs 10.12; after Rs 60 crore of non-deductible amortisation it falls to Rs 8.35.
Step 3Which piece moves EPS most?

Lay the change out per share. Issuing 4 crore shares spreads the old earnings thinner by Rs 1.18, Samudrika adds back Rs 2.35, interest takes Rs 1.06, and amortisation alone takes Rs 1.76, more than the entire cash gain. The deal's economics are a rounding error either way; the accounting is the big number.

From Rs 10.00 to cash and reported EPS, per share10.00Standalone EPS-1.18More shares+2.35Samudrika earnings-1.06After-tax interest10.12Cash EPS-1.76Amortisation8.35Reported EPS
Per share, dilution from new shares costs Rs 1.18, Samudrika's earnings add Rs 2.35 and interest costs Rs 1.06, giving cash EPS of Rs 10.12; amortisation then removes Rs 1.76, leaving reported EPS of Rs 8.35.
Step 4What should management tell investors?

Both numbers, with the bridge. Amortisation of acquired intangibles is a real accounting charge but not a cash cost, so cash EPS is the better guide to whether the deal pays for itself, and reported EPS is what the income statement will show. Hiding either invites distrust. Two limits are worth saying: if the amortisation were tax deductible, reported EPS would be about Rs 8.79, a smaller fall; and cash EPS still ignores whether Rs 1,200 crore was a fair price, which is a valuation question, not an EPS one.

Where candidates lose it

The common miss is stopping at cash EPS and calling the deal accretive. The interviewer gave you the purchase price allocation for a reason: on reported numbers the deal is sharply dilutive.

The second is tax-effecting the amortisation when the setup says it is not deductible. That shrinks the hit from Rs 60 crore to Rs 45 crore and understates the reported dilution.

What the interviewer asks next

  • What pre-tax synergies would make reported EPS neutral?
  • How would the answer change if all Rs 600 crore were goodwill instead of finite-life intangibles?
  • Would you rather pay all in shares here? Show the cash and reported EPS.

Asked at Point72, Transportation, New York, 2025 (Wall Street Oasis): In-person case study, 3 hours time on a company with no background/familiary. Was a 3hr acc/dil

Company names and figures are illustrative.