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What is accretion and dilution in a deal?

Highlighted from a real earnings story. Explained by Clicked.

Used in a sentence

The Daily Ledger · Markets

The press release called the purchase accretive in year one, though it never said what the company had paid.

The reader highlighted one word mid-article. Clicked explained the finance term “accretive” in plain language:

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Overview

A deal is accretive when it raises the buyer's earnings per share and dilutive when it lowers them. Earnings per share is a company's profit divided by its share count, so a purchase moves it in two ways at once. The earnings of the acquired business are added on top. If the buyer pays with newly issued shares, the share count underneath rises as well. Whichever of the two grows proportionally more decides the label.
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Overview

Accretive means a takeover pushed the buyer's earnings per share up, dilutive means it pushed them down. Earnings per share is profit divided by share count, and a deal messes with both numbers. Buy with cash and only the profit moves. Buy by printing new shares and you have grown the bottom of the fraction too. If the profit grows faster than the share count, earnings per share climbs. If it does not, earnings per share falls. That is the whole test. 😎

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Detail

Accretion and dilution describe what a takeover does to the buyer's earnings per share, and the word dilution is doing a different job here from its usual one. Ordinary dilution is about the percentage of a company you own. This test is about profit per share. Earnings per share is profit divided by the number of shares, and a deal changes both halves of that fraction. Say a buyer earns $100m across 100m shares, so $1.00 per share. It acquires a business earning $20m. Pay cash and earnings climb to $120m across the same 100m shares, which is $1.20 and clearly accretive. Pay instead by issuing 40m new shares and the sum becomes $120m across 140m shares, or about $0.86, which is dilutive. Same target, same earnings, opposite label. That is why the funding decides the outcome more often than the company being bought does. Two warnings follow. Accretion is not a verdict on the price paid, since a buyer who overpays can still report it by borrowing cheaply. And the test is usually run on the first year or two, which is short enough to miss most of what a deal turns out to be worth.
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Detail

Accretive and dilutive tell you which way a takeover shoved the buyer's earnings per share. Careful with the word dilution here, because this is not the losing-a-slice-of-ownership kind. Purely profit divided by share count. Say you make $50m on 25m shares, so $2 a share. You buy something making $6m. Hand over cash and you are on $2.24. Hand over 4m newly minted shares instead and you are on $1.93. Nothing about the target changed between those two sentences. Now the part worth carrying around. There is another shortcut to accretion and it has nothing to do with buying well. If the company you are buying is priced cheaply against its earnings compared with your own shares, then paying in shares makes the deal accretive almost automatically. Cheap against earnings is not the same as good. A buyer who wants the headline can get it by shopping among companies the market already rates poorly, which is a fine way to produce an accretive deal and no way at all to produce a sensible one. 😎

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Analogy

A consultancy with ten consultants bills $200,000 each, so $2m a year. It buys a smaller firm whose four consultants bill $250,000 each. Add them and the business bills $3m across fourteen people, about $214,000 each. Revenue per consultant has gone up, so on this measure the purchase is accretive. Had those four billed $120,000 each instead, the average would have dropped to about $177,000, and the same purchase would be dilutive. Nothing about the quality of the firm changed between the two versions. Only the ratio between what was added and what was already there.
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Analogy

Three dentists own a practice between them, equal partners, and it clears $150,000 a year. That is $50,000 each. The solo dentist next door earns $30,000. Buy her out with cash and the practice clears $180,000 split three ways, so $60,000 each. Take her in as a fourth equal partner instead and the same $180,000 splits four ways, which is $45,000 each. She brought the same $30,000 either way. What decided it was whether the partnership had to grow to get it. 😎
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AI explanations may contain errors · Not professional advice

Formal definition — The same term, explained the usual way

An acquisition is described as accretive where it increases the acquirer's earnings per share relative to the standalone position, and as dilutive where it reduces them. The outcome is determined jointly by the target's earnings contribution, the consideration structure and any financing costs incurred, since cash and debt consideration leave the share count unchanged while equity consideration increases it. Accretion analysis is customarily performed over the first one or two years following completion and is a measure of earnings-per-share impact only, carrying no implication as to the adequacy of the price paid or the economic merit of the transaction.

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