Walk me through the accretion/dilution analysis step-by-step for a stock-for-stock acquisition. How do you calculate whether the deal is accretive or dilutive to the acquirer's EPS?
A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
First, calculate the pro forma combined net income: add the acquirer's net income, the target's net income, and any after-tax synergies, then subtract any one-time deal costs and financing costs. Next, calculate the pro forma shares outstanding: add the acquirer's existing shares to the new shares issued to the target's shareholders. Divide pro forma net income by pro forma shares to get pro forma EPS. Compare this to the acquirer's standalone EPS. If pro forma EPS is higher, the deal is accretive; if lower, dilutive. The key drivers are the purchase price, the exchange ratio, and expected synergies.
WHAT INTERVIEWERS LISTEN FOR
- ✓Calculate pro forma net income
- ✓Calculate pro forma shares outstanding
- ✓Compare pro forma EPS to standalone EPS
- ✓Consider synergies and costs
COMMON MISTAKES
- ✗Ignoring one-time costs
- ✗Not adjusting for financing structure
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