Accretion/Dilution Analysis Explained: M&A Interview Guide
Master accretion/dilution analysis for M&A interviews. Learn the concept, calculations, and how to answer related interview questions.
Accretion/dilution analysis is a core M&A concept that comes up frequently in IB interviews. It measures how an acquisition affects the acquirer's earnings per share (EPS).
The Basic Concept
Note
Accretive: Combined EPS > Acquirer's standalone EPS → EPS increases
Dilutive: Combined EPS < Acquirer's standalone EPS → EPS decreases
When Company A acquires Company B:
- Acquirer gains the target's earnings
- But may issue new shares (diluting existing shareholders)
- Or may take on new debt (adding interest expense)
- The net effect determines accretion or dilution
The Quick Rule of Thumb
Fast Accretion/Dilution Test
For an all-stock deal:
- If Acquirer's P/E > Target's P/E → Accretive
- If Acquirer's P/E < Target's P/E → Dilutive
Why? If you're buying earnings "cheaper" than your own (lower P/E), the deal adds more EPS per share issued.
The Math Behind It
Pro Forma EPS = (Acquirer NI + Target NI + Synergies - Transaction Costs) / Pro Forma SharesCompare this to acquirer's standalone EPS to determine accretion/dilution.
Stock Deal Example
Example
Acquirer:
- Share Price: $50
- Shares Outstanding: 100M
- Net Income: $500M
- EPS: $5.00
- P/E: 10x
Target:
- Purchase Price: $600M (all stock)
- Net Income: $100M
- Implied P/E: 6x
Transaction:
- New shares issued: $600M / $50 = 12M shares
- Pro forma shares: 100M + 12M = 112M
- Pro forma Net Income: $500M + $100M = $600M
- Pro forma EPS: $600M / 112M = $5.36
Result: EPS increased from $5.00 to $5.36 → 7.2% Accretive
(Acquirer P/E of 10x > Target P/E of 6x → Accretive ✓)
Cash Deal Example
Example
Same acquirer, but paying cash:
- Purchase Price: $600M (all cash, funded by debt at 5%)
- Interest expense: $600M × 5% = $30M
- After-tax interest (25% tax): $30M × 0.75 = $22.5M
Transaction:
- No new shares issued
- Pro forma Net Income: $500M + $100M - $22.5M = $577.5M
- Pro forma EPS: $577.5M / 100M = $5.78
Result: EPS increased from $5.00 to $5.78 → 15.5% Accretive
Cash deals are often more accretive because you don't issue shares.
What Drives Accretion/Dilution?
Accretion Drivers
| Term | Definition | Note |
|---|---|---|
| Form of Consideration | Cash is often more accretive than stock | No share dilution |
| Relative P/E Ratios | Higher acquirer P/E → More accretive | For stock deals |
| Cost of Financing | Lower interest rate → More accretive | For cash/debt deals |
| Synergies | Higher synergies → More accretive | Cost and revenue |
| Target's Profitability | Higher target margins → More accretive | More earnings added |
Common Misconceptions
Accretion ≠ Value Creation
A deal can be:
- Accretive but value-destructive: You overpaid, but the math works short-term
- Dilutive but value-creating: You're investing in growth that will pay off
Accretion/dilution is a short-term EPS metric, not a measure of whether the deal creates long-term shareholder value. Don't confuse the two.
Interview Questions
Key Takeaways
Key Takeaway
- Accretive = combined EPS > acquirer standalone EPS
- Quick test: Acquirer P/E > Target P/E (stock deal) → Accretive
- Cash is often more accretive than stock (no share dilution)
- Synergies boost accretion by adding to combined earnings
- Accretion ≠ value creation — strategic fit matters more