How do you tell whether an acquisition is accretive or dilutive?

A deal is accretive if the buyer's earnings per share go up after the acquisition, and dilutive if they go down. So I compare pro forma EPS for the combined company with the buyer's standalone EPS. To get pro forma EPS, I add the two companies' net income and adjust for the financing. It depends a lot on how the buyer pays. With cash, the buyer gives up the interest it was earning. With debt, it pays new interest. With stock, the share count goes up. Then I divide the combined net income by the new share count. There's a shortcut for an all-stock deal. If the buyer's P/E is higher than the target's P/E, the deal is accretive. For cash or debt, I compare the after-tax cost of that cash or debt with the target's earnings yield, which is its earnings divided by the purchase price. If the yield is higher than the cost, it's accretive.

A deal is accretive if the buyer's earnings per share go up after the acquisition, and dilutive if they go down. So I compare pro forma EPS for the combined company with the buyer's standalone EPS. To get pro forma EPS, I add the two companies' net income and adjust for the financing. It depends a lot on how the buyer pays. With cash, the buyer gives up the interest it was earning. With debt, it pays new interest. With stock, the share count goes up. I'd also include synergies, and the extra amortization from any intangibles written up in the deal. Then I divide the combined net income by the new share count. There's a shortcut for an all-stock deal. If the buyer's P/E is higher than the target's P/E, the deal is accretive. That's because the buyer is paying with shares that are valued more highly than the earnings it's buying. I'd use the target's P/E at the price being paid, including the premium. For cash or debt, I compare the after-tax cost of that cash or debt with the target's earnings yield, which is its earnings divided by the purchase price. If the yield is higher than the cost, it's accretive. One caution is that accretive doesn't mean the deal creates value. A buyer with a high P/E can make almost any stock deal look accretive, and it could still be overpaying.