Walk Me Through an Accretion/Dilution Analysis

Step 1: Calculate the acquirer's standalone EPS (net income / shares). Step 2: Determine the purchase price and the financing mix — cash, debt, and/or stock. Step 3: Build pro forma net income = acquirer net income + target net income + after-tax synergies − after-tax incremental interest on new debt − after-tax forgone interest on cash used. Step 4: Calculate the pro forma share count = acquirer shares + new shares issued (only if stock is used as consideration). Step 5: Pro forma EPS = pro forma net income / pro forma shares; compare to standalone EPS. If higher, accretive; if lower, dilutive. The same logic underpins the formal accretion/dilution concept.

For a quick gut check, compare the acquirer's after-tax cost of each financing source to the target's earnings yield (inverse of P/E). Cash earns a low after-tax interest rate; debt costs an after-tax interest rate; stock 'costs' the acquirer's earnings yield (1 / acquirer P/E). The deal is accretive when the cost of financing is lower than the yield you're buying — i.e., the target's earnings yield (1 / target P/E adjusted for the premium). Rule of thumb in an all-stock deal: if the acquirer's P/E is higher than the target's (premium-adjusted) P/E, the deal is accretive; if lower, dilutive. This is why high-multiple acquirers can do EPS-accretive deals almost mechanically.

Common follow-ups: (1) 'What financing mix makes a deal most accretive?' — usually cash, then debt, then stock, because cash/debt are cheaper than equity for most companies. (2) 'What's the breakeven premium / breakeven P/E?' — the premium at which pro forma EPS equals standalone EPS. (3) 'Why might a strategic still do a dilutive deal?' — strategic rationale (synergies that take time, defensive consolidation, accretive on a cash-EPS basis after [goodwill] amortization, or value creation that EPS doesn't capture). (4) 'How do synergies change the answer?' — after-tax cost synergies flow straight into pro forma net income and can flip a dilutive deal to accretive. Be ready to layer in writedowns of deferred financing fees and new intangible amortization, which depress GAAP EPS.

The mature point that impresses interviewers: accretion/dilution measures the EPS impact, not whether the deal creates value. A deal can be accretive yet destroy value if the acquirer overpays — EPS can rise simply because cheap debt was used or a low-multiple target was bought, regardless of strategic fit. Conversely, a value-creating deal can be near-term dilutive. EPS accretion is a board-and-market optics metric; true value creation is captured by NPV / IRR on the acquired cash flows. Acknowledging this distinction signals you understand the limitation of the analysis.