In a merger model, what impact do additional shares outstanding have?

In a merger model, when additional shares are issued to finance a transaction, this generally leads to a decrease in Earnings Per Share (EPS) unless the increase in net income from the merger is substantial enough to offset the dilution caused by the increased share count.

EPS is calculated by taking the net income of a company and dividing it by the number of shares outstanding. When more shares are introduced into the market without a corresponding increase in net income, the denominator in the EPS calculation grows larger. As a result, the total income allocated to each share decreases, resulting in a lower EPS.

This concept is crucial in evaluating the financial health and investor perception of the company post-merger. If the merger leads to greater profitability and the net income increases significantly, it is possible for EPS to rise, but this would depend on the performance of the combined entity. In scenarios where the additional shares are not accompanied by proportional increases in earnings, EPS will decrease.