What Is Accretion?
Accretion describes a transaction that increases a key metric for the acquirer, almost always earnings per share in the M&A context. If a company would have earned $2.00 per share on its own but earns $2.10 per share after completing an acquisition, the deal is 5% accretive.
The opposite outcome is dilution, where the deal lowers EPS, and together they form the accretion/dilution analysis that accompanies nearly every public company deal. Because investors and boards watch EPS closely, accretion is often treated as shorthand for whether a deal is financially attractive.
How Accretion/Dilution Analysis Works
The analysis combines the acquirer's and target's net income, adjusts for the cost of financing the deal and any synergies, then divides by the pro forma share count. Suppose an acquirer earns $100 million with 100 million shares, or $1.00 of EPS, and buys a target earning $30 million by issuing 20 million new shares.
Pro forma net income is $130 million across 120 million shares, giving EPS of about $1.08, so the deal is roughly 8% accretive. Adding after-tax synergies would increase accretion, while cash interest expense or foregone interest income on cash used would reduce it.
What Drives Accretion
In an all-stock deal, the rule of thumb is that the transaction is accretive when the acquirer's P/E ratio is higher than the price it effectively pays for the target's earnings. More generally, a deal is accretive when the after-tax yield on the target's earnings exceeds the after-tax cost of the cash, debt, or stock used to fund it.
This is why cheap debt tends to make deals look accretive, since after-tax borrowing costs of a few percent are easy to beat. Importantly, accretion is not the same as value creation: a company can overpay for a target and still show an accretive deal on paper.
Accretion in Interviews and on the Job
Accretion/dilution is one of the most heavily tested technical topics in investment banking interviews, where candidates are asked to walk through the mechanics and judge quickly whether a hypothetical deal is accretive. Interviewers often probe the stock-versus-cash financing question and the P/E rule of thumb.
On the job, analysts build full merger models whose headline output is the EPS accretion or dilution in the first two or three years after closing, a figure that appears in board materials and deal announcements.
