1.1·6 min read

Accretion vs. Dilution

A merger model measures the impact of an acquisition on the buyer's earnings per share. Up is accretion; down is dilution.

By the end you can

✓State what a merger model is built to answer
✓Define accretion and dilution
✓Compute the accretion/(dilution) percentage

When one public company buys another, the first question the market asks is simple: is the buyer's earnings per share (EPS) higher or lower after the deal? A exists to answer exactly that. Everything else - the price, the financing, the accounting - feeds into one output: .

Accretion / Dilution

Accretion is an increase in the buyer's EPS after the deal closes. Dilution is a decrease. An acquisition is called or based on its effect on , not on whether it was a good deal.

\text{Accretion / (Dilution)} = \frac{\text{Pro Forma EPS}}{\text{Standalone EPS}} - 1

Pro forma = the combined company after the deal. Standalone = the buyer alone, before it.

Worked example · Read the headline number

Given

•Buyer standalone EPS: $4.00
• after the deal: $4.25

Solution

1. / ()
$\frac{4.25}{4.00} - 1 = 6.4\%$

Answer

The deal is 6.4% - it adds $0.25 to EPS. The market tends to reward and punish .

Accretive is not the same as good

A deal can be and still destroy value (you overpaid, but cheap debt masked it), or and still smart (a fast-growing target). / measures the EPS optics - judgment still matters.

Check yourself

Standalone EPS is $2.00 and pro forma EPS is $1.80. The deal is:

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Why Companies Acquire