What share price or P/E makes stock a sensible currency?

Is there a share price that makes stock a good currency?

No. A $0.50 share and a $50 share can be equally good or equally poor currency. What matters is the price relative to earnings and to value, not the number of dollars on one share. Exchange listing rules set minimum bid prices for staying listed, but that is a listing question, not a currency question. See Nasdaq listing requirements in 2026.

What is the simple P/E rule?

Compare your price-to-earnings multiple with the multiple you pay for the target. Paying entirely in stock raises your earnings per share when your multiple is higher than the target's. It lowers them when yours is lower. When they are equal, nothing changes.

This is a test of earnings per share only. Berkshire's Berkshire Hathaway 1994 shareholder letter warns against judging mergers by near-term earnings per share and says what counts is value per share. Treat the P/E test as a first screen.

What does the math look like at different multiples?

Assumptions. The acquirer has 10,000,000 shares and earns $5,000,000, so earnings per share are $0.50. The target earns $1,000,000 and is bought for $8,000,000, which is 8 times earnings. All shares are issued at the acquirer's market price, with no synergies, fees or taxes beyond those stated. Combined earnings are $6,000,000.

• Acquirer at 6x ($3.00): issues 2,666,667 shares. New EPS: 6,000,000 / 12,666,667 = $0.474, which is 5.3 percent lower.
• Acquirer at 8x ($4.00): issues 2,000,000 shares. New EPS: 6,000,000 / 12,000,000 = $0.500, unchanged.
• Acquirer at 12x ($6.00): issues 1,333,333 shares. New EPS: 6,000,000 / 11,333,333 = $0.529, which is 5.9 percent higher.
• Acquirer at 20x ($10.00): issues 800,000 shares. New EPS: 6,000,000 / 10,800,000 = $0.556, which is 11.1 percent higher.
• Acquirer at 30x ($15.00): issues 533,333 shares. New EPS: 6,000,000 / 10,533,333 = $0.570, which is 13.9 percent higher.

Break-even is at 8 times, the multiple paid. Above it, stock adds to earnings per share. Below it, stock takes away.

How does stock compare with borrowing the cash?

Add an alternative. The same $8,000,000 is borrowed at 8 percent. Interest is $640,000. At an assumed 25 percent tax rate, the after-tax cost is 640,000 x 0.75 = $480,000.

• Combined earnings: 5,000,000 + 1,000,000 - 480,000 = $5,520,000.
• EPS on 10,000,000 shares: $0.552, which is 10.4 percent higher.
• Stock at 20x gives $0.556, about equal. Stock at 12x gives $0.529, less than debt.
• Stock matches this debt case at about 18.4 times earnings. For EPS to equal $0.552, the $6,000,000 of combined earnings must be spread over 10,869,565 shares. That allows only 869,565 new shares, priced at 8,000,000 / 869,565 = $9.20 each, which is 9.20 / 0.50 = 18.4 times.

The lesson is that stock is cheap against debt only at a high multiple. Debt adds a fixed payment that stock does not, so a low-earnings or unstable company may still prefer stock.

What other limits matter before you call stock cheap?

• Your own estimate of value. A high multiple on inflated earnings is not cheap currency. See how you value your own stock.
• Size caps. A Nasdaq-listed company generally needs shareholder approval to issue 20 percent or more of its shares in an acquisition ( Nasdaq Rule 5635(a)).
• Price movement. A multiple can fall before closing. A fixed value or a collar protects the seller and can add dilution for you.
• Research. See what research says about stock versus cash.

Where these numbers come from: The caution on earnings per share is from the Berkshire Hathaway 1994 shareholder letter. The approval test is from Nasdaq Rule 5635(a). Every share count, multiple, price, interest rate and the 25 percent tax rate in the examples are assumptions. The arithmetic is mine. Confirm with your accountant.

Related questions

What P/E should I aim for before issuing stock?

There is no safe number. Use the multiple you are paying as the floor, a higher multiple against your debt cost as a second test, and your own value estimate as the third.

Is a low share price a problem for using stock?

The dollar price is not the issue. A very low price can bring listing or trading problems, and a thin market can make sellers wary.

Does the P/E rule work for a company with no earnings?

No. Use revenue or cash flow multiples, or value, and be cautious. Without earnings, the price is harder to defend.

What comes next

To see how disclosed serial acquirers have handled the same choice, see why Constellation Software almost never issued shares and Teledyne issued many.

Related articles

• Why did Constellation Software almost never issue shares, and Teledyne issue many?
• How do you value your own stock when using it to buy a company?
• When does paying with stock beat paying with cash?
• How do you avoid dilution in a public roll-up?
• Public roll-up vs private roll-up: how does the math compare?

Meraki Dealmakers is a service of Meraki Partners, LLC, an advisory firm. It is not a broker-dealer, investment adviser, business broker, law firm or accounting firm. This article is general information, not legal, tax or investment advice.