π° Financial Models
Accretion / Dilution Model
Accretion/dilution analysis is the first quantitative test applied to any M&A deal. It answers a single question: **does the combined company have higher or lower earnings per share (EPS) than the acquirer on a standalone basis?**
2
Minutes
6
Concepts
+15+30
Read+Quiz
1
The Core EPS Math
Pro-forma EPS = (Acquirer Net Income + Target Net Income + After-Tax Synergies β After-Tax Financing Cost)
/ (Acquirer Shares Outstanding + New Shares Issued)Breaking Down Each Component
Numerator adjustments:
- Acquirer Net Income: Standalone earnings, typically LTM or NTM consensus
- Target Net Income: Standalone earnings of the company being acquired
- Synergies: Cost savings (headcount, facilities, systems) and revenue synergies, taxed at the combined marginal rate. Cost synergies are more credible β revenue synergies are heavily discounted by the market.
- Financing cost: If debt-funded, the after-tax interest expense on new debt. If cash-funded, the lost interest income on the cash used (opportunity cost).
Denominator adjustments:
- New shares issued: Only applies to stock deals. If paying with cash or debt, no new shares are issued and the denominator stays the same.
Worked Example
Acquirer: $500M net income, 100M shares β $5.00 EPS
Target: $100M net income
Deal: $2B purchase price, 100% stock at $50/share β 40M new shares issued
Synergies: $30M pre-tax ($22.5M after-tax at 25% rate)
No incremental debt.
Pro-forma EPS = ($500M + $100M + $22.5M) / (100M + 40M)
= $622.5M / 140M
= $4.45
Standalone EPS: $5.00
Pro-forma EPS: $4.45
Dilution: -11.1%This deal is 11% dilutive β the acquirer needs to convince the market that synergies will grow or that the strategic value justifies the near-term hit.