Accretive vs. Dilutive Mergers: An Overview

A merger and acquisition (M&A) deal is said to be accretive if the acquiring firm's earnings per share (EPS) increase after the deal goes through. The deal is dilutive if the result causes the acquiring firm's EPS to decline.

Dilution and accretion are scientific terms that refer to the concentration of a chemical or element. A financial event is accretive whenever it causes an appreciation in EPS🌌. An event is dilutive when the resulting action causes E𓆏PS to drop.

Investors should be careful with this analysis, however. Not every ac𝔍cre🅠tive deal is necessarily good, and not every dilutive deal is bad.

Accretive Acquisition

An 澳洲幸运5开奖号码历史查询:accretive acquisition will increase the acquiring company's earnings per share. Accretive acquisitions tend to be favorable for the company's 澳洲幸运5开奖号码历史查询:market price because the price paid by the acquiring firm is lower than the boost that the 澳洲幸运5开奖号码历史查询:acquisition is expected to provid🎐e to the acquiring company's EPS.

An accretive acquisition is similar to the practice of bootstrapping where an acquirer purposely buys a company with a low price-earnings ratio through a stock s🌳wap transaction. The goal is to boost the post-acquisition earnings per share of the newly formed comb🤪ined business and encourage a rise in the price of its shares.

Bootstrapping is often frowned upon as an accounting practice that games the system and lowers overall earnings quality but an accretive acquisition pla💙ys to the combined synergies of a merger in a positive way.

Dilutive Acquisition

A dilutive acquisition is a takeover transaction that decreases the acquirer's EPS through lower or negative earnings contributions or if additional shares are issued to pay for the acquisition. A dilutive acquisition can decrease 澳洲幸运5开奖号码历史查询:shareholder value temporarily but it can potentially lead to a sufficient iℱncrease in EPS in later ♋years if the deal has strategic value.

The combination will generally be EPS-dilutive to the acquirer if the standalone earnings capacity of the target firm isn't as strong as the acquirer's. This may be the case in the first one or two years post-transaction closing but the acquisition should become accretive to earnings as revenues and cost synergies take hold through scale economies.

The market tends to punish the share price of the acquirer if the benefits aren't immediately clear. A lower EPS at the same trading multiple will reduce the stock price. An announcement of an EPS-accretive deal in year one will quickly reward shareholders with a higher stock price, however.

EPS and M&A Deals

The primary goal of a merger model is normally to determine if the acquiring company can increase its EPS after the deal goes through. A deal with accretive consequences should ostensibly create additional value for the firm's shareholders, a result that many consider to be the primary duty of a corporation's directors.

EPS might go up after an M&A deal for many reasons. The synergy between the two firms might result in increased economies of scale or scope. The target company's capital or research and development tools may lead to future gains in productivity or revenue generation. The financial analysts are looking for a sum value that's greater than the individual components in any case.

Analysts look at each company's P/E ratio. The merger should be accretive if the target company has a smaller P/E ratio. A momentary increase in EPS doesn't necessarily mean that the deal will be a long-term success, however.

The Bottom Line

Successfully executing a merger is a complex effort and it can be risky. There maꦅy be future unintended consequences that ultimately damage the new company's valuation or it could significantly improve depending on factors unique to those particular companies.

A merger generally can't occur without the consent of the majority of the target company's shareholders although the specifics are governed by state law. The acquiring company's shareholders may have to agree as well. Their stocks may increase or plummet in value and may be particularly volatile during the transition, affecting investors.