Why EPS is a poor measure for M&A deals

Summary: PS-based deal analysis may look attractive, but it’s often financial window-dressing that hides real risks. A better M&A framework lies in assessing free cash flows, DCF valuations and credible synergies. For Indian investors, focusing on these fundamentals is key to spotting whether a merger creates lasting value or just headlines. Mergers and acquisitions (M&A) are among the most dramatic corporate actions. They promise strategic growth, market dominance or entry into high-potential sectors. Unsurprisingly, in India’s capital markets, M&A announcements trigger immediate debate: Will this deal reshape the industry, or will it destroy shareholder value? History, however, is sobering. International studies suggest that between 70 and 90 per cent of acquisitions fail to create value. In India, too, many transactions have been disappointing, weighed down by overly optimistic projections, regulatory hurdles and the practical difficulties of integrating diverse businesses. Why do companies keep repeating these missteps? A large part of the answer lies in the yardsticks used to justify deals. The most common – earnings per share (EPS) accretion or dilution – is appealing in its simplicity, but flawed as a guide to value. A more robust framework, as offered by Michael Mauboussin and Alfred Rappaport in ‘Expectations Investing’, shifts the lens to focus on free cash flow (FCF), discounted cash flow (DCF) valuation and the expectations already embedded in stock prices. For Indian investors, where deal flow has been rising, estimates suggest that transaction values will exceed $50 billion in the first half of 2025 alone. This framework provides a disciplined approach to determining whether an acquisition genuinely enhances wealth or merely generates headlines. Why EPS accretion is a poor compass EPS is an accounting outcome, not an economic reality. Consider a company with a high price-to-earnings (P/E) ratio acquiring another firm with a lower P/E ratio. If the deal is structured in stock, the arithmetic can lift the acquirer’s EPS even if the target adds no real incremental cash flow. In some cases, total combined earnings may actually fall, but

This article was originally published on October 01, 2025.