An Accretion/Dilution analysis is a staple of M&A modeling used to determine whether a proposed merger or acquisition will increase (accrete) or decrease (dilute) the combined company’s Earnings Per Share (EPS).
At its core, the analysis compares the pro-forma EPS (the EPS of the new, combined entity) against the acquirer’s standalone EPS.
The Mechanics of the Analysis
To calculate the impact, you must adjust the combined net income for several transaction-related items:
- Synergies: Expected cost savings or revenue boosts.
- Incremental Interest Expense: The cost of new debt used to fund the deal.
- Foregone Interest on Cash: The interest income lost by using internal cash for the purchase.
- New Share Issuance: If the deal is funded by stock, the denominator (shares outstanding) increases.
- Intangible Amortization: New depreciation or amortization arising from the write-up of assets.
Global Business Examples
The success of a deal often hinges on whether the market believes the short-term dilution is worth the long-term strategic gain.
Salesforce and Slack (Strategic Dilution)
When Salesforce acquired Slack for $27.7 billion in 2021, the deal was initially dilutive to Salesforce’s non-GAAP earnings. Because the deal was funded with a significant mix of cash and stock, the increase in share count and the cost of debt outweighed Slack’s immediate earnings contribution. However, Salesforce justified this by focusing on long-term revenue synergies and the integration of Slack into their “Customer 360” platform.
Disney and 21st Century Fox (The Synergy Play)
Disney’s $71 billion acquisition of 21st Century Fox in 2019 was a massive undertaking involving both cash and stock. To ensure the deal became accretive, Disney targeted $2 billion in cost synergies by 2021. By streamlining overlapping corporate functions and integrating Fox’s library into Disney+, they aimed to offset the massive interest expense and share issuance required to close the deal.
AstraZeneca and Alexion (Immediate Accretion)
In 2021, the pharmaceutical giant AstraZeneca acquired Alexion for $39 billion. This was a classic example of an “accretive from day one” deal. AstraZeneca used its strong balance sheet to fund the acquisition, and Alexion’s high-margin rare disease portfolio provided an immediate boost to the combined company’s cash flow and EPS, even after accounting for the new shares issued to Alexion’s investors.
Key Drivers of Accretion vs. Dilution
| Factor | Effect on EPS |
| High P/E Acquirer buys Low P/E Target | Generally Accretive (using stock) |
| Low P/E Acquirer buys High P/E Target | Generally Dilutive (using stock) |
| High Cost of Debt | Increases interest expense, leading to Dilution |
| High Synergies | Increases Net Income, leading to Accretion |
The “P/E Rule”
In an all-stock deal, if the Acquirer’s P/E ratio is higher than the Target’s P/E ratio, the deal will be accretive. This is because the acquirer is essentially “buying” earnings at a cheaper multiple than its own shares are valued at.