Gain an understanding of how to conduct an accretion/dilution analysis, a crucial tool for evaluating the implications of a prospective merger or acquisition deal, including step by step calculations and key factors to consider.
- An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger or acquisition deal
- The accretion/dilution analysis determines if the post-transaction earnings per share (EPS) is increased or decreased
- The managers in a prospective M&A deal need to consider many factors, such as the negotiation process, the global impact, and the compatibility of the companies
- The process of an accretion/dilution analysis begins with estimating pro-forma net income to eventually arrive at pro-forma earnings per share (EPS)
- An increase in pro-forma EPS is regarded as an accretion, while a decrease is regarded as a dilution
Steps for Accretion / Dilution Analysis
- Estimate a pro forma net income for the combined entities
- Calculate the combined company's new share count
- Tabulate the prospective acquirer’s share count. Factor new shares that would be issued to make the purchase if it's a stock deal
- Divide pro-forma net income by pro-forma shares to arrive at a pro-forma EPS
An increase in EPS is regarded as accretion, while a decrease is regarded as dilution.
Check your numbers before presenting them. Incorporate some professional skepticism on prospective synergies
Accretion / Dilution Calculation
|
Target and Acquirer net income |
Calculate = EPS * share count |
|
Synergies |
Estimate and benchmark |
|
Proforma net income |
Target + acquirer + synergies post tax – interest post tax |
|
New shares issued |
Calculate = equity issued / acquirer share price |