Druvik Software trades at 30x earnings and buys Namyaa Services for 18x earnings, paying entirely in new shares. Is the deal accretive, by how much, and does that make it a good deal?

The deal is about 7.1% accretive, but that says nothing about whether it creates value. Druvik issues 1.2 crore shares, and combined earnings of Rs 120 crore over 11.2 crore shares give EPS of Rs 10.71. The rise comes only from paying with 30x stock for 18x earnings. With no synergies, the combined company is worth what the two were worth apart, so the share price should stay near Rs 300 and the P/E falls to 28.0x.

Think of two shopkeepers swapping. One has goods the market prices richly, the other has goods priced cheaply. If the first pays for the second's shop with his own pricey goods, he gets a lot of shop for a little of his stock. An all stock deal is accretive whenever the acquirer's P/E is higher than the P/E it pays, because its shares cost less, in earnings given up, than the earnings they buy. Druvik's shares cost it 3.3% in earnings yieldEarnings divided by price, the inverse of the P/E. A P/E of 30 is an earnings yield of 3.3%.; Namyaa earns 5.6% on its price.

Now prove it. Rs 360 crore at Rs 300 a share is 1.2 crore new shares. Combined earnings are Rs 100 crore plus Rs 20 crore, Rs 120 crore, over 11.2 crore shares. EPS rises from Rs 10.00 to Rs 10.71, up 7.1%.

No, and this is the half of the question that is really being asked. With no synergies, the combined company is worth Druvik's Rs 3,000 crore plus the Rs 360 crore Namyaa was worth, Rs 3,360 crore, over 11.2 crore shares. That is Rs 300 a share, exactly where Druvik started: EPS is up 7.1% and value per share is unchanged. The market simply applies a lower multiple, 28.0x, to a mix of a 30x business and an 18x business.

If the market kept paying 30x on the new EPS, the shares would rise to Rs 321 out of nothing. Companies once grew this way, buying low P/E businesses with high P/E stock and reporting rising EPS, until the growth that justified the high multiple ran out. Namyaa is on 18x for a reason: perhaps it grows slower or is riskier. Mixing it in should dilute Druvik's multiple.

Value created, not EPS. Druvik's shareholders gain only if Namyaa is worth more inside Druvik than the Rs 360 crore paid, through cost savings, cross-selling or faster growth. Then ask about the price: 18x may be cheap or dear depending on Namyaa's growth. A strong answer reads: 7.1% accretive mechanically, neutral on value without synergies, and good only if the synergies and Namyaa's own growth justify the price.