How investment bankers model accretion and dilution in deal analysis

Accretion and dilution models assess the impact of a deal on earnings per share.

One of the central questions in evaluating a merger or acquisition is how the transaction affects the acquirer's earnings per share (EPS). An accretive deal increases the acquirer's EPS post-transaction, while a dilutive deal decreases it. Investment bankers use accretion/dilution models to forecast this impact, helping management and boards assess the deal’s financial viability and communicate its value to investors.

The analysis compares pro forma EPS to standalone EPS.

The core concept involves projecting the combined company's EPS and comparing it to the acquirer's EPS if no transaction occurred. The standard steps include:

1. Forecasting standalone net income of the acquirer.

2. Adding the net income of the target (adjusted for synergies, interest effects, and amortization).

3. Adjusting for deal financing (debt, cash, stock issuance).

4. Calculating the new share count, including issued shares and options.

5. Comparing the pro forma EPS to the acquirer’s original EPS.

If the pro forma EPS is higher, the deal is accretive. If lower, it’s dilutive.

Financing structure heavily influences the outcome.

How the transaction is financed—whether through cash, debt, or stock—directly affects EPS impact:

Financing Type	Effect on EPS
Cash	Typically accretive if cost of cash is lower than target's yield
Debt	Accretive or dilutive depending on interest expense vs. earnings
Stock	Often dilutive due to increased share count unless high synergy

The model also incorporates tax effects, amortization of intangibles, and estimated synergies to refine the pro forma net income.

Sensitivity tables show how assumptions drive results.

Bankers often present sensitivity tables to explore how varying assumptions affect accretion/dilution outcomes. These may include:

• Purchase price ranges

• Synergy realization levels

• Interest rates on new debt

• Stock price changes (for share-based deals)

This helps boards understand the upside/downside under different market or operational scenarios.

Synergies play a critical role in turning dilution into accretion.

Synergies—especially cost synergies—can turn a marginally dilutive deal into an accretive one. Bankers distinguish between:

• Cost synergies: Elimination of duplicate functions, procurement efficiencies, overhead reduction.

• Revenue synergies: Harder to model and justify, often excluded in base case analysis.

Accretion from synergies is calculated by estimating post-tax savings and adding it to the pro forma net income.

Pro forma share count adjustments require careful treatment.

When stock is issued as part of the deal, the banker must accurately project:

• New shares issued to acquire the target

• Option and convertible security dilution

• Any treasury stock method adjustments

Misestimating the pro forma share count can materially distort the accretion/dilution conclusion.

Accretion is not always positive; dilution is not always negative.

A highly strategic or long-term transformative deal may be dilutive in the short term but create substantial value over time. Conversely, an accretive deal may mask underlying weaknesses, such as low-growth target businesses or heavy leverage. Boards are cautioned to view accretion/dilution in the broader strategic and risk context.

Accretion/dilution models remain a vital communication tool—internally during deal approval and externally with shareholders—but must be supported by deeper analysis of integration, capital structure, and long-term returns.

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