Accretion / Dilution Analysis

Step 1: Calculate the acquirer's standalone EPS (Net Income / Diluted Shares). Step 2: Calculate the target's contribution to combined earnings (target Net Income, adjusted for deal financing costs and synergies). Step 3: Calculate new share count (acquirer's shares + any new shares issued to pay for the deal). Step 4: Pro Forma EPS = Combined Net Income / New Diluted Share Count. If Pro Forma EPS > Standalone EPS, the deal is accretive. The analysis is performed for Years 1, 2, and 3 post-close.

Financing mix: using cash or debt (lower cost) is more accretive than issuing equity (which increases share count). Purchase price: a higher premium increases dilution. Relative P/E ratios: if the acquirer's P/E is higher than the target's, a stock deal is naturally accretive (you're buying cheaper earnings). Cost synergies: expense savings flow directly to combined net income, improving accretion. Revenue synergies are typically not included because they are harder to achieve and less credible to investors.

In an all-stock deal: if the acquirer's P/E > target's P/E, the deal is accretive. If the acquirer's P/E < target's P/E, the deal is dilutive. Why? A high-P/E acquirer issues fewer shares (its stock is 'expensive') to buy a low-P/E target (the target's earnings are 'cheap'). This rule is a quick shortcut but doesn't account for synergies, financing mix, or transaction costs. Always build the full model for precision.

Public company acquirers are sensitive to EPS dilution because it can pressure their stock price. Most boards will not approve a deal that is dilutive beyond Year 1 without a compelling strategic rationale and clear path to accretion. Investment banks present accretion/dilution analysis in every merger model pitch book to address this concern. However, accretion/dilution alone does not determine whether a deal creates value — a dilutive deal with strong NPV may still be the right move, and an accretive deal at an inflated enterprise value can destroy value.