What makes an acquisition accretive or dilutive to EPS?

Question

AcadiFi · Accepted Answer

An acquisition is ACCRETIVE if pro forma EPS exceeds standalone acquirer EPS, and DILUTIVE if pro forma EPS is lower. The math is mechanical:

Pro forma EPS = (Acquirer Net Income + Target Net Income + Synergies - After-Tax Financing Cost) / (Acquirer Shares + New Shares Issued)

General rules:
- Stock deal: accretive if acquirer's P/E > target's P/E (after synergies). The acquirer is trading high-priced paper for lower-priced earnings.
- Cash deal: accretive if target's earnings yield (1/PE) > after-tax cost of debt used to finance the deal.
- Cash + debt financing makes deals MORE accretive because no new shares are issued.

WORKED EXAMPLE: Brightline Technologies (P/E 25) acquires Meridian Software (P/E 15) for $500M. Brightline pays cash funded by 4% after-tax debt.
- Meridian earnings: $33M (so earnings yield = 6.7%)
- Debt cost: $500M * 4% = $20M after-tax interest
- Net accretion: $33M - $20M = $13M added to Brightline's $150M baseline
- No new shares; EPS rises from $1.50 to $1.63. ACCRETIVE.

CAUTION: EPS accretion does NOT mean value creation. A high-PE firm can always boost EPS by buying low-PE firms (bootstrap earnings trick), but long-term value depends on genuine synergies and ROI, not EPS mechanics.

CFA Level II tests both the mechanical math AND the conceptual warning: accretion/dilution is a starting point, not the final verdict.

What makes an acquisition accretive or dilutive to EPS?

Master Level II with our CFA Course

Related Questions

Practice Questions