EPS Accretion/Dilution Analysis: What It Is and How to Explain It in Interviews
Michael King, PE Investment Manager · 8 min read · (updated )
- 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.
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Frequently asked questions
What makes a deal accretive or dilutive?
It depends on how the deal is paid for. In a cash deal, accretion turns on whether the target earns more than the after-tax cost of the debt used to buy it. In a stock deal, it turns on relative P/E ratios: an acquirer with a higher P/E than the target is buying cheap earnings with expensive shares, which is accretive. Post-deal EPS above standalone EPS is accretive; below it is dilutive.
How do you calculate accretion or dilution?
Five steps. Calculate the acquirer's standalone EPS as net income over shares outstanding. Build pro-forma net income as acquirer plus target net income, plus synergies, less transaction costs, new interest expense and intangible amortisation, all tax-adjusted. Add any newly issued shares to get pro-forma share count. Divide to get pro-forma EPS. Then express the change as pro-forma EPS minus standalone EPS, over standalone EPS.
Can you give a worked accretion example?
An acquirer with £270M of net income and 500M shares has a standalone EPS of £0.54. It buys a target earning £65M, issuing 36M new shares and taking on £38M of new annual interest, with £27M of synergies and £6M of after-tax intangible amortisation. Pro-forma net income is £318M over 536M shares, giving £0.593 — accretion of about 9.8%.
Does an accretive deal mean a good deal?
No, and this is the point interviewers press on. Accretion is a short-term earnings metric that says nothing about price paid or value created. A deal can be accretive and still destroy value if the acquirer overpaid or the synergies never materialise. Conversely a dilutive deal can create substantial value if it positions the acquirer strategically. Accretion answers whether next year's EPS goes up, not whether the acquisition was worth doing.