Using the 1:5 exchange ratio, Riley will issue 600,000 shares (3,000,000 / 5). The 1:5 conversion ratio is intuitive if you note that Riley’s pre-merger stock price is $50 per share and Durable’s market cap is $30,000,000 (3,000,000 x $10). Riley issues 600,000 new shares to generate the funds to purchase Durable ($30,000,000 market cap / $50 = 600,000 shares). Thus, the total number of shares outstanding after the merger would be 9,600,000 shares. The total post-merger income ([$3.50 / share × 9,000,000] + [$2.25 / share × 3,000,000]) = $38,250,000. Therefore the post-merger EPS is $38,250,000 / 9,600,000 shares = $3.98.

The result of bootstrapping is the creation of the appearance of growth in earnings. The acquiring firm is essentially exchanging high P/E shares for low P/E shares. The combined entity has fewer total shares outstanding than the two separate entities, but the same earnings, resulting in a higher EPS