Accretion / Dilution
Whether an acquisition increases (accretive) or decreases (dilutive) the acquirer’s earnings per share. A standard merger-model output and a common technical interview topic.
Why Accretion / Dilution matters in interviews
Accretion/dilution is the first question a public-company board asks about a deal, so it is the first question a banking interviewer asks about merger models. It is also a rare technical with a clean shortcut, which is exactly why interviewers like it — they can watch you reach for the shortcut or grind through the model.
How it works in practice
A deal is accretive if the acquirer's pro-forma earnings per share rises, dilutive if it falls. You build it by combining the two companies' net income, adding after-tax synergies, subtracting after-tax incremental interest on any acquisition debt and any foregone interest on cash used, then dividing by the new share count including shares issued as consideration.
The shortcut for an all-stock deal: compare the P/E ratios. If the acquirer's P/E is higher than the target's effective P/E (purchase price / target net income), the deal is accretive. Acquiring a cheaper company with expensive paper adds to EPS.
For cash and debt consideration, compare the after-tax cost of the funding to the target's earnings yield (the inverse of its P/E). Debt at 6% pre-tax and a 25% tax rate costs 4.5% after tax; if the target is bought at 15x, its earnings yield is 6.7%, so the deal is accretive.
What candidates get wrong
- Forgetting to tax-affect the incremental interest expense and the synergies.
- Ignoring foregone interest income when cash on the balance sheet funds the deal.
- Treating accretion as a proxy for value creation. A deal can be accretive to EPS and still destroy value if the acquirer overpaid — the two questions are separate, and good interviewers will push you on it.
- Omitting incremental D&A from the write-up of acquired intangible assets in purchase accounting.
Accretion / Dilution: frequently asked questions
Is an accretive deal always a good deal?
No. Accretion measures the direction of pro-forma EPS, not whether value was created. An acquirer with a high P/E can buy almost any lower-multiple business and report accretion while still paying more than the target is worth. Value creation depends on whether the price paid is below the present value of the cash flows plus synergies acquired.
What is the quick way to tell if an all-stock deal is accretive?
Compare P/E multiples. If the acquirer trades at a higher P/E than the multiple it is paying for the target, the deal is accretive to EPS. If it pays a higher multiple than its own, it is dilutive. This holds before synergies and transaction adjustments.
Go deeper
This term comes up constantly in investment banking interviews and on the desk.
Investment Banking interview prepRelated Investment Banking terms
Go further than reading
The written material is free. These are the ways to get it applied to your own work.
CV Review by a Human
Written margin-note feedback on structure, impact bullets and ATS-readability. Reviewed by Suro, not an AI score.
$25 48h turnaround
Cover Letter Review by a Human
Line-by-line review of argument, tailoring and tone, with a rewritten opening as a worked example.
$50 48h turnaround
Inner Circle
Membership: premium tools, role intros, the private community and members-only intel.
$79 /month
Browse the full glossary — 150+ finance recruiting and technical terms, in plain English.