Short definition: Accretion/dilution refers to the impact of a transaction on a company’s earnings per share (EPS). Accretion occurs when a transaction increases EPS, while dilution occurs when a transaction decreases EPS.
Explanation: This concept is often used in mergers and acquisitions (M&A) to assess the financial impact of a deal on the acquiring company’s shareholders. Accretive transactions are generally viewed positively by investors as they increase shareholder value, while dilutive transactions can be perceived negatively as they reduce shareholder value.
Example: If Company A acquires Company B, the transaction is considered accretive if the combined EPS of the new entity is higher than Company A’s EPS before the acquisition. Conversely, if the combined EPS is lower, the transaction is considered dilutive.
Additional information (optional): Accretion/dilution analysis is a complex calculation that takes into account various factors such as the purchase price, the target company’s earnings, and the financing structure of the deal. It is just one factor that investors consider when evaluating an M&A transaction.