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Accretion / Dilution

Accretion/Dilution Basics

EPS Impact

Compare combined company EPS to acquirer's standalone — accretive if higher.

Deal Structure Matters

Cash-financed deals tend to be more accretive than stock-financed.

Synergies Boost

Cost and revenue synergies improve the EPS calculation.

Quick Litmus Test

If acquirer P/E > target P/E (after-tax cost of debt adjusted), deal is accretive.

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Noble Desktop's Financial Analyst Training Program covers financial modeling, valuation, accounting, and Excel for finance.

Gain an understanding of how to conduct an accretion/dilution analysis, a crucial tool for evaluating the implications of a prospective merger or acquisition deal, including step by step calculations and key factors to consider.

  • An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger or acquisition deal
  • The accretion/dilution analysis determines if the post-transaction earnings per share (EPS) is increased or decreased
  • The managers in a prospective M&A deal need to consider many factors such as the negotiation process, the global impact, and the compatibility of the companies
  • The process of an accretion/dilution analysis begins with estimating pro-forma net income to eventually arrive at pro-forma earnings per share (EPS)
  • An increase in pro-forma EPS is regarded as an accretion, while a decrease is regarded as a dilution

Steps for Accretion / Dilution Analysis

  1. Estimate a pro forma net income for the combined entities
  2. Calculate the combined company's new share count
  3. Tabulate the prospective acquirer’s share count. Factor new shares that would be issued to make the purchase if it's a stock deal
  4. Divide pro-forma net income by pro-forma shares to arrive at a pro-forma EPS

An increase in EPS is regarded as accretion, while a decrease is regarded as dilution.

Check your numbers before presenting them. Incorporate some professional skepticism on prospective synergies

Accretion / Dilution Calculation

Target and Acquirer net income

Calculate = EPS * share count

Synergies

Estimate and benchmark

Proforma net income

Target + acquirer + synergies post tax – interest post tax

New shares issued

Calculate = equity issued / acquirer share price

Video Transcript4 sections

1Full Video Transcript

2Introduction to Accretion/Dilution Analysis

In this video we're going to talk about the accretion/dilution analysis that you would perform for M&A transactions. An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger or acquisition deal. The accretion/dilution analysis determines if the post-transaction earnings per share is increased or decreased.

The managers in a prospective M&A deal need to consider many factors such as the negotiation process, the global impact, and the compatibility of the companies. The process of an accretion/dilution analysis begins with estimating pro forma net income to eventually arrive at pro forma earnings per share. An increase in pro forma earnings per share is regarded as an accretion, while a decrease is regarded as a dilution.