When is a deal accretive

Measure content performance. Develop and improve products. List of Partners vendors. If the resulting deal causes the acquiring firm's EPS to decline, the deal is considered to be dilutive. Investors should be careful with this analysis. Not every accretive deal is necessarily good, and not every dilutive deal is bad. Dilution and accretion are scientific terms that refer to the concentration of a chemical or element. When used in conjunction with stock ownership, a financial event is accretive whenever it causes an appreciation in EPS.

Conversely, an event is dilutive whenever the resulting action causes EPS to drop. An accretive acquisition will increase the acquiring company's earnings per share EPS. Accretive acquisitions tend to be favorable for the company's market price because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS. An accretive acquisition is similar to the practice of bootstrapping , wherein an acquirer purposely buys a company with a low price-earnings ratio through a stock swap transaction in order to boost the post-acquisition earnings per share of the newly formed combined business and encourage a rise in the price of its shares.

But while bootstrapping is often frowned upon as an accounting practice that games the system and lowers overall earnings quality , an accretive acquisition plays to the combined synergies of a merger in a positive way. A dilutive acquisition is a takeover transaction that decreases the acquirer's EPS through lower or negative earnings contribution or if additional shares are issued to pay for the acquisition. A dilutive acquisition can decrease shareholder value temporarily, but if the deal has strategic value, it can potentially lead to a sufficient increase in EPS in later years.

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

The market tends to punish the share price of the acquirer if the benefits are not immediately clear. A lower EPS, after all, at the same trading multiple will reduce the stock price. Conversely, an announcement of an EPS-accretive deal in Year 1 will quickly reward shareholders with a higher stock price.

EPS is calculated as net income, minus paid dividends to preferred shareholders, divided by the average number of outstanding shares. When Kellogg acquired Keebler Foods, many analysts were expecting a dilutive deal. On a third of accretive deals had done the same. Harvard chalked it up to one word: discipline. This emphasizes the need to do more than just a surface analysis of current pro-forma EPS of the acquirers and the acquired, and do the grunt work in coming months and years to make sure that the two merged companies synergize.

Contact Sales. Support: Follow us:. What is an Accretive Acquisition? December 9, Uncategorized By Jake Mize. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. An accretive acquisition increases the acquiring company's earnings per share EPS. Accretive acquisitions tend to be favorable for the company's market price because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS.

While bootstrapping is often frowned upon as an accounting practice that games the system and lowers overall earnings quality, an accretive acquisition plays to the combined synergies of a merger in a positive way. An accretive acquisition increases the synergy between the acquired and the acquirer.

This synergy occurs when the combination of two organizations produces a combined value that is greater than the sum of the separate parts. There are many cases where an established company seeks to add value to its shareholders through a strategic acquisition. Unlike an acquisition that is conducted due to research and development or product acquisition purposes, as was the case with Facebook's purchase of Oculus Rift, an accretive acquisition immediately increases the value of the acquiring company's stock.

For example, if a large, public technology company wants to increase its EPS immediately, thus increasing its share price, it would look to acquire a smaller technology company with a higher EPS. If the cost of acquiring the company is 10 cents per share, the net benefit is positive. However, since pro-forma financial statements and to month forecasts are used to derive the potential accretive value of the acquisition, synergies are not guaranteed.

In fact, the only way to realize the added value of combining firms is to integrate both companies effectively and efficiently, so there are no lost benefits.

Often, the combination of the firms fails, and the resulting entity realizes an EPS that falls short of expectations causing the firm to lose overall value.

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