If firm A aqcuires firm B, is it prudent to add their net incomes to see the impact on earnings? If not, why?

Answer 1

how did they pay for Firm B?

if it was a straight exchange of shares for shares, you're on the right track.

however, if Firm A used cash and/or debt to buy Firm B, then either their interest income or their interest expense, or both, changed because of the purchase.

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What is critical to an investor is whether EPS [earnings per share] went up after the deal. If it did go up, there is a fair chance the deal was worthwhile. If it doesn't, there is a fair chance the deal wasn't worthwhile.

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At the next level of sophistication, one has to ask if the overall risk carried by the shareholders went up or down, as well as whether EPS went up or down.

It is possible to increase the overall risk so much in buying Firm B that even though EPs goes up, the share price goes down because investors rightly see that the total risk of the firm has increased too much.

Answer 2

It's a good figure to know. But, the most important # involves the possible overpayment (if any) for B, which can affect the new co. for years. If possible, compute firm A's PE prior to xaction, to PE after, which will involve a raft of expenses like paying off debt, financing expense, CEO payoffs,and gains like selling off subsidiaries and on and on. Usually, it's better to just let the new company settle out unless you can rely on research of somebody who's done all the work for you. Their net incomes may also suffer from unpaid taxes, pending law suits, etc. I'm just an average investor so if you see a bullet-proof good buy, go for it!