Accretion/(dilution) analysis measures the effects of a transaction on a potential acquirer’s earnings, assuming a given financing structure. It centers on comparing the acquirer’s earnings per share (EPS) pro forma for the transaction versus on a standalone basis.

If the pro forma combined EPS is lower than the acquirer’s standalone EPS, the transaction is said to be dilutive; conversely, if the pro forma EPS is higher, the transaction is said to be accretive.

We cover 3 practice questions and provide an overview of the exchange ratio calculation and the theory behind why increasing equity in deal consideration results in lower pro forma EPS.

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