EPS Accretion/Dilution Analysis: What It Is and How to Explain It in Interviews
8 min read
- A deal is accretive if post-deal EPS exceeds standalone EPS; dilutive if it decreases
- In cash deals, accretion depends on target earnings vs. after-tax financing cost; in stock deals, it depends on relative P/E ratios
- An accretive deal is not always a good deal — accretion is a short-term metric that ignores long-term value
- The five-step calculation: standalone EPS, pro-forma NI, pro-forma shares, pro-forma EPS, and the percentage change
What Accretion/Dilution Measures
Accretion/dilution analysis tells you whether a deal increases or decreases the acquirer's earnings per share (EPS). If post-deal EPS is higher than standalone EPS, the deal is accretive. If lower, it is dilutive.
This matters because boards and shareholders care about whether an acquisition will improve or harm the acquirer's near-term profitability.
The Core Logic
| Deal Type | What Drives Accretion | Key Test |
|---|---|---|
| Cash deal | Target earnings vs. after-tax financing cost | Does the target earn more than the cost of the debt used to buy it? |
| Stock deal | Relative P/E ratios | Is the acquirer's P/E higher than the target's? (Buying cheap earnings with expensive shares) |
Step-by-Step Calculation
Worked Example
Acquirer: Net Income £270M, 500M shares → Standalone EPS = £0.54
Target: Net Income £65M. Acquirer issues 36M new shares and takes on £38M new annual interest. Synergies add £27M to combined NI. Intangible amortisation reduces NI by £6M (after tax).
Pro-forma NI: £270M + £65M + £27M - £38M - £6M = £318M
Pro-forma Shares: 500M + 36M = 536M
Pro-forma EPS: £318M / 536M = £0.593
Common Interview Questions
"Is an accretive deal always a good deal?" — No. Accretion is a short-term metric. A deal can be accretive but destroy long-term value if the acquirer overpays or synergies do not materialise. Conversely, a dilutive deal can create value if it positions the acquirer strategically.
"What makes a stock deal more likely to be dilutive?" — When the acquirer's P/E is lower than the target's. You are issuing expensive shares (in P/E terms) to buy expensive earnings. The math works against you.
"How can you quickly tell if a deal is accretive without building a model?" — Compare the seller's earnings yield at the purchase price to the weighted cost of acquiring them. The seller's yield = target net income ÷ equity purchase price. The cost of acquisition depends on how the deal is financed: after-tax cost of cash (foregone interest × (1 - tax rate)), after-tax cost of debt (interest rate × (1 - tax rate)), or cost of stock (1 ÷ buyer's P/E). If the seller's yield exceeds the weighted cost, the deal is accretive. If it is lower, the deal is dilutive.
"What happens to the combined P/E multiple after a deal?" — The combined P/E always falls between the buyer's standalone P/E and the seller's purchase P/E, weighted toward the larger company. If the buyer is 5x larger than the target, the combined P/E will be much closer to the buyer's. This is why large companies acquiring small targets see minimal EPS impact regardless of the target's valuation.
"Does the deal structure affect EV/EBITDA?" — No. EV/EBITDA is capital-structure neutral, so it does not change based on whether the deal is financed with cash, debt, or stock. P/E does change because the financing method affects interest expense and share count, which hit net income and EPS differently. This is a common interview trap: candidates assume all multiples behave the same way post-deal.
Take Your Preparation Further
Build and analyse a full merger model with our Merger Model Template — includes PPA, synergies, and accretion/dilution analysis. For comprehensive interview prep, see the IB Interview Bible.
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