Bootstrapping involves a high growth, high P/E ratio firm purchasing slow growth firms with low P/E ratios. The low P/E implies that the acquiring firm can purchase the firm “cheap” since its stock exhibits a higher price for a given level of earnings. The end result is that the earnings of the two firms are added together, while the exchange of high P/E company’s shares are made at a less than 1 to 1 ratio for the low P/E company shares. Thus, earnings per share will increase due to the lower total number of shares outstanding. |
