An acquisition is accretive when the buyer's earnings per share go up after the deal and dilutive when they go down. Accretion and dilution analysis is the arithmetic that tells you which, and by how much. Below is one deal worked five ways (all stock, all debt, cash on hand, a 50/50 mix and an overpriced version), followed by the two shortcuts that let you answer in an interview without a calculator.

Who wrote this. We make Soreno, an AI interviewer for finance and consulting interviews. Every figure below was recomputed with a script before publishing, and the arithmetic is shown so you can check it.

The deal

	Buyer	Target
Net income	$500 million	$100 million
Shares outstanding	250 million	n/a
Earnings per share	$2.00	n/a
Share price	$40	n/a
P/E multiple	20x	15x at the offer price
Offer price for the equity		$1,500 million

The tax rate is 25%. To keep the mechanics clear, the examples leave out fees, synergies and the extra amortization that comes from writing up the target's assets. The section near the end adds them back.

The four steps

Combine the earnings. Buyer net income plus target net income.
Subtract the after-tax cost of the money used. Interest on new debt, or interest no longer earned on cash that was spent.
Count the new shares. The stock part of the price divided by the buyer's share price.
Divide and compare. New net income over new share count, against the buyer's EPS before the deal.

Case 1: all stock

New shares: $1,500 million / $40 = 37.5 million.
Combined net income: 500 + 100 = $600 million. No financing cost.
Shares: 250 + 37.5 = 287.5 million.
EPS: 600 / 287.5 = $2.09.

EPS rises from $2.00 to $2.09. The deal is 4.3% accretive.

Case 2: all debt at 6%

Interest: 6% of $1,500 million = $90 million. After tax: 90 x 75% = $67.5 million.
Combined net income: 500 + 100 minus 67.5 = $532.5 million.
Shares: unchanged at 250 million.
EPS: 532.5 / 250 = $2.13.

6.5% accretive. Debt beats stock here because its after-tax cost is lower than the cost of issuing shares, as the shortcut below shows.

Case 3: cash on the balance sheet earning 3%

Interest given up: 3% of $1,500 million = $45 million. After tax: $33.75 million.
Combined net income: 600 minus 33.75 = $566.25 million.
EPS: 566.25 / 250 = $2.27.

13.3% accretive. Cash is almost always the cheapest way to pay, which is why the order of preference in an interview answer is cash, then debt, then stock.

Case 4: half stock, half debt

New shares: $750 million / $40 = 18.75 million.
Interest on $750 million of debt at 6%: $45 million, or $33.75 million after tax.
Combined net income: 600 minus 33.75 = $566.25 million.
Shares: 268.75 million.
EPS: 566.25 / 268.75 = $2.11.

5.3% accretive, between the all-stock and all-debt results, as it should be.

Case 5: the buyer overpays

Same target, but the offer is $2,500 million in stock, which is 25x the target's earnings.

New shares: 2,500 / 40 = 62.5 million.
Combined net income: $600 million.
Shares: 312.5 million.
EPS: 600 / 312.5 = $1.92.

4% dilutive. To get back to $2.00, the combined company needs 312.5 x $2.00 = $625 million of net income, which is $25 million more than it has. That is $25 million of after-tax synergies, or about $33 million before tax. "How much in synergies does the deal need to break even?" is the most common follow-up, and this is how to answer it.

All five side by side

Case	Financing	New shares (m)	Net income ($m)	EPS	Change
Before the deal			500	$2.00
1	All stock, $1,500m	37.5	600	$2.09	+4.3%
2	All debt at 6%	0	532.5	$2.13	+6.5%
3	Cash earning 3%	0	566.25	$2.27	+13.3%
4	Half stock, half debt	18.75	566.25	$2.11	+5.3%
5	All stock, $2,500m	62.5	600	$1.92	-4.0%

Shortcut 1: compare P/E multiples (all-stock deals)

In an all-stock deal, if the buyer's P/E is higher than the P/E it pays for the target, the deal is accretive. If it is lower, the deal is dilutive.

Case 1: buyer at 20x buys at 15x. Accretive.
Case 5: buyer at 20x buys at 25x. Dilutive.
Break-even: the buyer pays exactly 20x, which is $2,000 million. New shares are 50 million, EPS is 600 / 300 = $2.00. No change.

The reason: a buyer on a higher multiple is paying with expensive paper for cheaper earnings.

Shortcut 2: compare yields (any financing)

Turn everything into a yield and compare the cost of the money with what the target earns on the price.

Target's earnings yield at the offer price: 100 / 1,500 = 6.7%.
Cost of stock: the buyer's earnings yield, 1 / 20 = 5.0%.
Cost of debt: 6% x (1 minus 25%) = 4.5%.
Cost of cash: 3% x (1 minus 25%) = 2.25%.

Every cost is below 6.7%, so every version of the $1,500 million deal is accretive, and the cheaper the money, the more accretive it is. For a mix, weight the costs: half stock and half debt costs (5.0% + 4.5%) / 2 = 4.75%.

The same logic gives the break-even price for a debt deal: the target's $100 million of earnings divided by the 4.5% after-tax cost of debt is about $2,220 million. Above that price, interest costs more than the target earns.

What a real model adds

Synergies. Cost savings and extra revenue, after tax, added to combined net income. Usually phased in over two or three years.
Purchase accounting. The target's assets are written up to fair value, and the new intangibles are amortized, which lowers reported earnings.
Fees and financing costs. Advisory fees are expensed, and debt issuance costs are spread over the life of the debt.
Lost interest and new share count details. Cash used, options and convertible securities all change the numbers at the edges.

In an interview, name these after you have given the simple answer. Do not start with them.

Accretive does not mean good

A deal can lift EPS and still destroy value, because EPS ignores the price paid and the risk taken on. A buyer with a high multiple can make almost any acquisition look accretive by paying in stock. What matters to shareholders is whether the return on the money invested is higher than its cost. Saying this unprompted is what separates a strong answer from a correct one.

How to practice

Redo the five cases with the numbers covered. Then change one input (the buyer's share price, the interest rate, the offer price) and say whether accretion goes up or down before you calculate.

For the spoken version, see our example answers to is a deal accretive or dilutive and why two companies with the same earnings trade at different multiples, the M&A case study and the list of investment banking technical questions.

FAQ

What does accretive mean in M&A?

The buyer's earnings per share are higher after the deal than they would have been without it. Dilutive means they are lower.

How do you tell quickly whether a stock deal is accretive?

Compare P/E multiples. If the buyer trades at a higher multiple than the one it is paying for the target, the deal is accretive.

Is cash or stock more accretive?

Cash is usually the most accretive, then debt, then stock, because that is the usual order of cost. Cash gives up a low rate of interest, debt costs its after-tax interest rate, and stock costs the buyer's earnings yield.

Can a dilutive deal still be a good deal?

Yes. A buyer may accept lower EPS for a few years to gain growth, technology or market position. The test is whether the deal earns more than its cost of capital over time.

How are synergies treated?

They are added to combined pre-tax income, taxed, and included in net income. The break-even question asks how much in synergies is needed for EPS to equal the buyer's EPS before the deal.

Accretion and Dilution Analysis: A Worked Example