What Is Accretion/Dilution Analysis?
Accretion/dilution analysis compares an acquirer's pro forma earnings per share after a transaction to what its standalone EPS would have been. If pro forma EPS comes out higher, the deal is accretive; if it comes out lower, the deal is dilutive; if the two are equal, the deal is breakeven. Analysts typically present the result as a percentage change in EPS for each of the first two or three years after closing.
The analysis matters because public company boards, equity research analysts, and shareholders all pay close attention to EPS. A deal announced as meaningfully dilutive tends to draw skepticism and can pressure the acquirer's stock, so bankers run accretion/dilution math on nearly every combination they pitch, often before any detailed valuation work begins.
How to Run the Analysis
The analyst sums acquirer and target net income, then layers in after-tax deal adjustments before dividing by the pro forma share count. Debt financing adds after-tax interest expense, cash on hand gives up after-tax interest income, and stock financing increases the number of shares outstanding. Expected synergies are added on an after-tax basis, and incremental amortization from purchase accounting write-ups is subtracted.
Suppose an acquirer earns $500 million on 200 million shares, for EPS of $2.50, and buys a target earning $120 million for $1.5 billion in cash funded entirely with 5% debt at a 25% tax rate. After-tax interest of about $56 million brings pro forma net income to roughly $564 million on an unchanged share count, lifting EPS to about $2.82, so the deal is roughly 13% accretive.
Rules of Thumb and Limitations
In an all-stock deal, the classic shortcut is that the transaction is accretive when the acquirer's P/E exceeds the effective P/E it pays for the target, because it is exchanging expensively valued earnings for cheaper ones. More generally, a deal is accretive whenever the after-tax yield on the target's earnings beats the after-tax cost of the funding used, which is why low borrowing rates make almost any deal screen accretive.
Accretion does not equal value creation. A buyer can dramatically overpay yet still show accretive EPS math simply because debt is cheap, and interviewers frequently probe whether candidates understand that distinction. In practice, accretion/dilution is a screening and communication tool that sits alongside DCF and comparable company work rather than replacing them.
