Accretion / Dilution
Definition
Accretion/dilution analysis measures whether an acquisition increases (accretive) or decreases (dilutive) the acquirer's earnings per share. You compare pro forma EPS — combined net income of both companies, adjusted for deal effects, divided by the pro forma share count — against the acquirer's standalone EPS.
Key adjustments: add the target's net income, add after-tax synergies, subtract after-tax interest expense on new acquisition debt, subtract foregone after-tax interest income on cash used, subtract incremental after-tax amortization of newly created intangibles, and add any new shares issued as stock consideration to the denominator.
A common shortcut for 100% stock deals: if the acquirer's P/E is higher than the target's effective purchase P/E, the deal is accretive; if lower, dilutive. Equivalently, compare the after-tax cost of the acquisition financing to the target's earnings yield (E/P). Note that accretion is an accounting outcome, not proof of value creation.
Why interviewers ask
This is arguably the single most tested M&A concept. Interviewers ask you to walk through a quick accretion/dilution math case ("Company A at 20x P/E buys Company B at 10x in an all-stock deal — accretive or dilutive?") or to explain why an accretive deal can still destroy value. You must know the mechanics for cash, stock, and debt consideration cold.
Related terms
Interviews don't test definitions — they test recall under pressure.
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