Why would a company do a deal that's dilutive?

Separate EPS from value: a deal creates value if it earns more than the cost of capital. Then give concrete reasons, a fast-growing target, synergies that arrive later and non-cash amortization, and say dilution still needs a believable path to accretion.

The numbers, step by step

Figures in millions except per share. The buyer earns $100 on 100 shares at $15. It pays $500 in stock for a target earning $20. Then the target grows 25% a year and the buyer 5%.

New shares issued$500 ÷ $15

about 33 million

Pro forma EPS in year one($100 + $20) ÷ (100 + 33.3)

$0.90

Dilution$0.90 ÷ $1.00 − 1

10% dilutive

Buyer alone, year three EPS$1.00 × 1.05^3

about $1.158

Combined, year three EPS($100 × 1.05^3 + $20 × 1.25^3) ÷ 133.3

about $1.161

What the interviewer listens for

• Do you separate EPS from value creation?
• Do you give concrete reasons like growth and synergy timing?
• Do you know non-cash amortization can cause GAAP dilution?
• Do you say dilution still needs a believable payoff?

Common mistakes

• Saying a company should never do a dilutive deal.Value comes from returns above the cost of capital, not year-one EPS.
• Giving only vague strategic reasons.Name concrete ones like growth, synergy timing and non-cash amortization.
• Saying dilution doesn't matter.Markets punish dilution that has no clear path to accretion.
• Treating accretion as proof a deal is good, which is the same mistake in reverse.

Likely follow-ups

• Is an accretive deal always a good deal?No, because a buyer with a high P/E can make almost any stock deal accretive while overpaying. The test is the return on the price against the cost of capital.
• What is cash EPS?EPS with the after-tax amortization of acquired intangibles, and sometimes other non-cash charges, added back. Frequent acquirers often report it next to GAAP EPS.

More finance technicals

• What is an earnout, and when would you use one?
• Tell me about a recent deal you've followed.
• What's the difference between an asset deal, a stock deal and a 338(h)(10) election?
• How does a buy-side M&A process work?
• How do you tell whether an acquisition is accretive or dilutive?

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