Accretion / Dilution Analysis Flashcards
(30 cards)
What is accretion in M&A?
When the acquirer’s post-deal EPS increases due to the acquisition.
What is dilution in M&A?
When the acquirer’s post-deal decreases after the acquisition.
Why do companies perform accretion / dilution analysis?
To evaluate the short-term financial impact of a deal on EPS.
Is accretion always good?
Not necessarily - a deal can be accretive but still destroy long-term value.
What does the accretion/dilution formula compare?
Pre-deal EPS vs. post-deal EPS for the acquiring company.
What is the formula for post-deal EPS?
Combined Net Income / Total New Share Count
What happens to EPS if new shares are issued and target earnings are low?
EPS may decline = dilution.
What if a cash deal brings in strong target earnings?
Likely EPS increases = accretion.
What’s the relationship between cost of financing and earnings yield?
If cost < earnings yield = accretive;
If cost > earnings yield = dilutive.
What is earnings yield?
Target Net Income / Purchase Price
Why are all-cash deals usually accretive?
No share dilution and typically low cost of cash vs. earnings from the target.
Why are all-stock deals more often dilutive?
Issuing new shares spreads earnings over a larger base.
How does a mixed cash/stock deal affect EPS?
It depends on the balance between dilution and the cost of financing.
What is the cost of equity in this context?
The implied earnings that shareholders expect per new share issued.
Why is cost of debt sometimes better than equity for M&A?
Debt is cheaper and offers tax benefits, though it raises leverage.
What’s needed to run a basic accretion / dilution model?
Acquirer & target net income, deal size, financing method, new shares issued.
Why use fully diluted share count?
It reflects the total possible dilution (incl. options, convertibles etc)
What’s the effect of issuing fewer shares at a high valuation?
Less dilution or possibly accretion if target earnings are strong.
Why is synergy modeling important in this analysis?
Synergies can boost post-deal net income and make a deal accretive.
What tax benefit comes from debt financing?
Interest expense is tax-deductible, lowering effective cost.
What are revenue synergies?
Top-line gains like cross-selling or expanded market access.
What are cost synergies?
Bottom-line savings from overlapping functions or operations.
Give an example of a synergy that affects EPS?
Cutting duplicate HR teams = reduces SG&A = increases net income.
When are synergies most commonly realized?
Within 12-24 months post-acquisition, though timing varies.
