Accretion / Dilution Example: A Worked Walkthrough
The first question on almost every M&A deal: does buying this company make our EPS go up or down? Here's the whole calculation on one clean example — and the shortcut that answers it in seconds.
Why this matters
Why interviewers ask it
Accretion/dilution is the fastest read on whether a merger helps or hurts the acquirer's shareholders on day one. When an acquirer issues new stock to buy a target, it adds the target's earnings but also spreads earnings across more shares. If earnings rise faster than the share count, EPS goes up — the deal is accretive. If the share count rises faster, EPS falls — the deal is dilutive.
Bankers run this before almost anything else, and interviewers love it because it exposes whether you actually understand what issuing shares does to per-share value. It's pure, quick arithmetic with a clean shortcut hiding underneath — the perfect on-the-spot test.
This guide walks one all-stock deal end to end, shows the P/E shortcut that skips the math entirely, notes how cash and debt change the picture, and then hands you a graded drill so it becomes second nature.
Worked example
One all-stock deal, start to finish
The inputs
- Acquirer net income$250M
- Acquirer shares outstanding100M
- Acquirer share price$50
- Target net income$50M
- Offer (all-stock, no synergies)$500M
Step 1 — Acquirer's standalone EPS
Start with what the acquirer earns per share today:
EPS = 250 / 100 = $2.50
Step 2 — New shares issued
An all-stock deal is paid in the acquirer's own stock, so the number of new shares is the offer value divided by the share price:
New shares = 500 / 50 = 10M shares
Step 3 — Pro-forma EPS
Combine the two companies' earnings, spread them across the larger share count, and divide:
Pro-forma shares = 100 + 10 = 110M
Pro-forma EPS = 300 / 110 = $2.73
Step 4 — Accretion or dilution?
Compare pro-forma EPS to the standalone $2.50:
→ the deal is accretive
EPS climbs from $2.50 to $2.73 — about 9% accretion. The acquirer's shareholders own a slice of a bigger earnings pool, and earnings grew faster than the share count did.
The shortcut
Answer it in seconds with P/E
You can skip the arithmetic entirely. In an all-stock deal with no synergies, compare the two P/E multiples:
Target P/E paid = offer / target NI = 500 / 50 = 10.0x
The acquirer trades at 20x but is paying only 10x for the target's earnings. It's issuing expensive shares to buy cheap earnings, so EPS must rise — the deal is accretive, exactly as the full calculation confirmed.
The rule generalizes: an all-stock deal is accretive when the acquirer's P/E exceeds the P/E it pays for the target, dilutive when it's lower, and breakeven when they match. Interviewers often ask the accretion question expecting exactly this one-line answer before any numbers.
One layer deeper
How cash and debt change it
The example above is all-stock, which is the cleanest case because the only moving part is the share count. Cash and debt deals work differently: no new shares are issued, so the denominator is unchanged — but the acquirer either gives up interest income on the cash it spends or takes on new interest expense on the debt it raises. That after-tax interest cost lowers pro-forma net income.
The practical takeaway interviewers want: when borrowing costs (or forgone yields on cash) are low relative to the target's earnings yield, cash and debt deals tend to be more accretive than stock deals — you avoid diluting the share count while adding earnings. When rates are high, the interest drag can flip an otherwise-accretive deal to dilutive. Mention that trade-off and you've shown you understand the mechanics beyond the rote formula.
Watch out
Common mistakes
Forgetting to issue new shares
The whole point of a stock deal is that the acquirer prints new shares to pay for the target. Combining net incomes but leaving the share count unchanged is the single most common error — and it always overstates accretion. Add the new shares before dividing.
Confusing accretion with value creation
Accretion/dilution is a mechanical EPS test, not a verdict on whether the deal is smart. An accretive deal can still destroy value if the acquirer overpays; a dilutive deal can create value if the strategic logic and synergies are real. Compute it fast, then add the caveat.
Using market cap instead of the offer for target P/E
The shortcut compares the acquirer's P/E to the P/E it actually pays — the offer value over target earnings, including any premium — not the target's standalone trading multiple. Using the unaffected market price ignores the premium and will point you the wrong way on borderline deals.
Ignoring synergies when the prompt includes them
The clean example assumes no synergies. If the interviewer hands you cost or revenue synergies, they flow into pro-forma net income (after tax) and push the deal toward accretion. Read the prompt and fold them in rather than defaulting to the no-synergy case.
FAQ
Frequently asked questions
What is accretion / dilution analysis?
It measures whether an acquisition raises or lowers the acquirer's earnings per share (EPS). If pro-forma EPS after the deal is higher than the acquirer's standalone EPS, the deal is accretive; if it's lower, the deal is dilutive. It's the first quick test bankers run to judge whether a deal 'works' for shareholders on day one.
How do you calculate accretion / dilution in an all-stock deal?
Compute the acquirer's standalone EPS (net income ÷ shares). Find the new shares issued (offer equity value ÷ acquirer share price). Add the two companies' net incomes for pro-forma net income, and add the new shares to the acquirer's share count for pro-forma shares. Pro-forma EPS = pro-forma net income ÷ pro-forma shares. The percentage change versus standalone EPS is the accretion or dilution.
What is the P/E shortcut for accretion / dilution?
In an all-stock deal with no synergies, the deal is accretive when the acquirer's P/E is higher than the P/E it pays for the target, and dilutive when it's lower. Intuitively, a high-P/E acquirer issues 'expensive' shares to buy 'cheaper' earnings, so EPS rises. It's the fastest way to answer 'accretive or dilutive?' without any arithmetic.
How does cash or debt financing change the answer?
Cash and debt deals don't issue new shares, so the share count is unchanged — but the acquirer gives up interest income on the cash used, or takes on new interest expense on debt raised. That after-tax interest cost reduces pro-forma net income. With rates low relative to earnings yields, cash/debt deals are often more accretive than all-stock; when borrowing costs are high, the interest drag can flip a deal to dilutive.
Does accretion mean the deal is a good deal?
No. Accretion/dilution is an EPS-mechanics test, not a value test. A deal can be accretive and still destroy value if the acquirer overpays or the synergies never materialize, and a dilutive deal can create enormous value over time. Interviewers expect you to compute it fast and then caveat that accretion alone doesn't justify a transaction.
Now make the math automatic
Reading a worked example is one thing — doing it under a timer is another. Run the graded accretion/dilution drill with fresh numbers every attempt, or build a full merger model.
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