Walk me through an accretion/dilution analysis

Accretion/dilution is the standard M&A technical, and it's asked in two very different ways. Sometimes the interviewer wants the full mechanical build: pro forma net income over pro forma share count. Sometimes they want the shortcut, delivered in fifteen seconds, and are testing whether you can hold the intuition in your head.

Prepare for both. The question underneath either version is the same: does this deal raise or lower the acquirer's earnings per share, and do you understand why that isn't the same question as whether it's a good deal?

Define it in one sentence. A deal is accretive if pro forma EPS is higher than the acquirer's standalone EPS, and dilutive if it's lower.

Then walk the build.

Pro forma net income:

• Acquirer standalone net income
• Plus target standalone net income
• Plus after-tax synergies
• Less after-tax interest on any new debt raised
• Less after-tax foregone interest income on any cash used
• Less after-tax incremental D&A from writing up acquired assets to fair value

Pro forma share count:

• Acquirer shares outstanding
• Plus new shares issued, calculated as the stock portion of the purchase price divided by the acquirer's share price

Then: pro forma EPS = pro forma net income / pro forma shares. Compare to standalone.

Then give the shortcut, because it's often what they're after. In an all-stock deal, compare P/E multiples: if the acquirer's P/E is higher than the P/E being paid for the target (at the offer price, including premium), the deal is accretive. Higher-multiple companies buying lower-multiple companies creates accretion, all else equal.

The general version uses yields. The cost of each funding source is an after-tax yield — cash is the after-tax interest income forgone, debt is the after-tax cost of debt, and stock is the acquirer's earnings yield (the inverse of its P/E). Weight them by how much of the deal each funds, and compare to the target's earnings yield at the purchase price. If what you're buying yields more than what you're paying, the deal is accretive.

Close with the judgment point. Accretion is not value creation. A deal can be accretive and still destroy value if you overpaid, and dilutive in year one while being strongly value-creating over time. It's worth stating that breakeven synergies — the level of synergies at which pro forma EPS exactly equals standalone EPS — is often the more useful output than the accretion figure itself.

Mechanical fluency. Can you list the pro forma net income adjustments without stalling? This is a build you're expected to know cold.

Whether you understand the funding trade-off. Cash is usually the cheapest form of consideration in EPS terms because forgone interest income is low. Stock is usually the most expensive. Interviewers will change the funding mix mid-question to see whether you're calculating or recalling.

Whether you use the offer price. The P/E shortcut works against the P/E implied by what you're actually paying, including the control premium. Candidates who use the target's unaffected trading multiple get the sign wrong on borderline deals.

Judgment. The best answers volunteer that accretion is an EPS outcome, not a valuation conclusion — that's the distinction between someone who's memorised the model and someone who understands what it's for.