Tool · 15
Accretion / Dilution
Pro forma earnings per share for an acquisition, the breakeven synergy level, and the P/E rule of thumb shown next to the cases where it fails.
The two companies
The deal
Cash on the balance sheet was earning something. Spending it costs that.
Result
The rule of thumb, and where it fails
In an all-stock deal, compare the acquirer's P/E to the P/E it is paying for the target. Higher means accretive. That is it, and it works because issuing shares at 20x to buy earnings at 13x buys more earnings than it gives away.
This deal is not all stock, so the rule does not apply. Cash costs forgone interest and debt costs interest, and neither shows up in a P/E comparison. That is the first place the rule fails.
The second place it fails: accretion is an arithmetic result, not a verdict. A deal can be accretive and destroy value, because paying a 30% premium for a business you then run badly still adds earnings per share on day one.
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