SuperdayReps
M&A

Accretion / dilution

By SuperdayReps · Wharton MBA · ex-Greenhill · investment banking interview coaching

4 min read · updated June 29, 2026

Accretion/dilution answers one blunt question the acquirer's CFO and board care about: does this deal raise or lower our earnings per share? If pro-forma EPS (the combined company's EPS after the deal) goes up, the deal is accretive. If it goes down, it's dilutive. That's the whole test: an EPS sensitivity, run before anyone gets excited about strategic logic.

The build is a sequence, and interviewers want the sequence: combine the two companies' net incomes, add after-tax synergies, subtract the after-tax cost of financing the deal, then divide by the new pro-forma share count. Compare that to the acquirer's standalone EPS.

Pro-forma EPS=Acquirer NI+Target NI+Synergies−After-tax financing costAcquirer shares+New shares issued\text{Pro-forma EPS} = \frac{\text{Acquirer NI} + \text{Target NI} + \text{Synergies} - \text{After-tax financing cost}}{\text{Acquirer shares} + \text{New shares issued}}

Cash vs. stock: what changes the answer

The financing decides a lot, because each source has a different "cost" that eats into combined earnings:

  • Cash: funded off the balance sheet or new debt. The cost is the forgone interest on the cash or the after-tax interest on the new debt. With rates low relative to earnings yields, cash deals usually come out accretive.
  • Stock: the acquirer prints new shares to pay the seller. The cost is dilution of the share count. Whether it helps or hurts depends entirely on the relative P/E ratios.
  • Debt: like cash, the cost is after-tax interest. Cheaper than equity, so it tends toward accretive.

Keep reading

The rest of this lesson is free with an account

There's about 2 more minutes of Accretion / dilution below this, plus every other lesson in M&A. Free account, no card.

Create a free account I already have one

Any partner school .edu

Frequently asked

What makes a deal accretive or dilutive?
A deal is accretive if pro-forma EPS rises above the acquirer's standalone EPS, and dilutive if it falls. You combine the two companies' net incomes, add after-tax synergies, subtract the after-tax cost of financing, then divide by the new pro-forma share count. That is the whole test.
In an all-stock deal, how do you tell if it is accretive or dilutive?
Compare the two P/E ratios. If the acquirer's P/E is higher than the target's, the all-stock deal is accretive; if it is lower, it is dilutive. A high-P/E buyer issues expensive shares to buy cheaper earnings, so each new share brings in more income than it costs, and EPS rises.
Does accretive mean it is a good deal?
No. Accretion measures only the EPS impact, not whether the deal creates value. A company can run an accretive acquisition that destroys value by overpaying for declining earnings, or a dilutive one that is strategically brilliant. Never confuse the EPS arithmetic with a verdict on value; they can point in opposite directions.
LearnAI