Glossary
Deal economics
What is accretion / dilution?
Whether an acquisition raises or lowers the buyer's earnings per share.
Paid in stock, a deal is accretive when the target's earnings yield on the price beats the buyer's own (1 ÷ P/E); paid in debt, when it beats the after-tax interest rate. Accretion says nothing about whether the price was right.
A worked example
An acquirer trades at 20x earnings. If it issues shares to buy a target at 15x earnings, it's swapping expensive paper for cheaper earnings, so EPS goes up: accretive. Pay 25x for the target and EPS goes down: dilutive.
Where it catches you in the game
- Mandate cards show accretion at your number in years one and two; above the buyer's breakeven, bids disappoint.
It comes up most on the investment banking desk.
Related terms
Learn it by using it
Definitions stick once they've cost you money. Take a seat, make three calls a year and watch what accretion / dilution does to your returns.