M&A · 4 min read

Accretion and dilution explained

A deal is accretive if the buyer's earnings per share (EPS) go up after the acquisition, and dilutive if they go down. You'll be asked to judge it quickly.

The quick rule for all-stock deals

If the buyer's P/E is higher than the P/E it pays for the target, the deal is accretive. The buyer is paying with "expensive" shares for "cheaper" earnings.

Cash and debt deals

Compare the after-tax cost of the money with the target's earnings yield (1 ÷ purchase P/E). Cash costs the interest it would have earned, after tax. Debt costs its interest rate, after tax. If the target's yield is higher than the cost, the deal is accretive.

What changes the answer

Synergies make deals more accretive.
Transaction fees and extra depreciation from asset write-ups make them less accretive.
Accretive doesn't mean good: a deal can add to EPS and still destroy value.

Check you've got it

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Multiple choice

An acquirer trading at 20x P/E buys a target at 15x P/E (including the premium), paying entirely in new shares. Is the deal accretive or dilutive to the acquirer's EPS?

Assumes: 100% stock deal. Ignore synergies and transaction costs.