Accretion/Dilution: Does the Deal Help or Hurt EPS? — M&A Analysis

§ 01

AAPL — EPS, P/E Ratio. Open AAPL on the Ledge to see current values.

§ 02

Accretive if: Target EPS Contribution > Financing Cost per Share

§ 03

A deal is accretive simply because a higher-P/E buyer acquires a lower-P/E target — this is arithmetic, not value creation. Accretion analysis is necessary but not sufficient for evaluating a deal.

§ 04

If a company with a 25x P/E acquires one with 12x P/E, the deal is almost certainly accretive. But ask: did they overpay? Is the target’s lower P/E justified by slower growth or higher risk?

§ 05

A deal is 15% accretive to EPS in Year 1. Does this mean the acquirer’s stock should rise 15%?

§ 06

Accretion from buying a lower-P/E company is financial engineering. True value creation comes from synergies that wouldn’t exist without the merger. Always look past accretion to ask: are we creating value or just rearranging it?

§ 07

Company A (P/E 25) acquires Company B (P/E 15) with 100% stock. Before deal: A's EPS $4, B's EPS $2. Post-deal share count rises 30%. Is the deal accretive or dilutive to A's EPS?

Five questions · AI feedback

Sit with the ideas.

Buyer has P/E of 25x (earnings yield 4%). They acquire a target with P/E of 10x (earnings yield 10%) using all debt at 5% interest. Is the deal accretive or dilutive?

Why:

Sit with the ideas.

Other lessons in this course.