To perform an Accretion/Dilution Analysis, you need to take the following steps:
- Determine Acquisition Price: Price per share offered to target company shareholders multiplied by number of shares outstanding (fully diluted basis).
- Determine Offer Structure: Percentage of offer that will be paid in cash and percentage that will be paid in shares of the buyer, and any amount of additional debt the buyer needs to take on in order to have enough cash in aggregate.
How does an accretion dilution model work?
An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger or acquisition deal. The accretion/dilution analysis determines if the post-transaction earnings per share (EPS) is increased or decreased.
How do you calculate accretion?
The accretion rate is determined by dividing a bond's discount by the number of years in its term to maturity.
How do you know if a transaction is accretive or dilutive?
An acquisition is said to be "accretive" if the buyer's eps goes up post-deal; it is "dilutive" if the buyer's eps goes down.
Why is accretion dilution important?
Level of Accretion Dilution as a Critical Issue As Accretion and Dilution Analysis is a simple test used to determine whether the proposed merger or acquisition will increase or decrease the post-transaction earnings per share (EPS), it is vital in determining whether a company should make the leap.
What is accreted value?
Accreted value is the value, at any given time, of a multi-year instrument that accrues interest but does not pay that interest until maturity. The most well-known applications include zero-coupon bonds or cumulative preferred stock. Accreted value of a bond may not have any relationship to its market value.
What is accretion and how does it occur?
Accretion is the gradual accumulation of solid materials due to gravitational forces. In the accretion process, gas and dust are attracted by gravitational forces to form a central collection of matter that accumulates and attracts more matter as it increases in mass.
Can you do accretion dilution for private companies?
This analysis is an attempt to estimate the effect of the M&A transaction on the earnings per share (EPS) of the company. An increase in EPS is called accretion, while a decrease in EPS is known as dilution. It is most commonly used with public companies rather than private companies.
How do you analyze mergers and acquisitions?
There are three major steps to conducting a merger or acquisition analysis: Step 1: Obtaining a purchase price. Step 2: Estimating sources and uses of funds. Step 3: Creating a pro-forma analysis.
What is an accretion or dilution of EPS?
EPS accretion / dilution allows shareholders of an acquirer company to see whether an acquisition of a target will lead to an increase in their earnings per share. It is an important metric in deciding whether the acquisition should go ahead or not.
How do you figure out a seller's yield?
How to calculate yieldDetermine the market value or initial investment of the stock or bond.Determine the income generated from the investment.Divide the market value by the income.Multiply this amount by 100.
Why do black holes have accretion disks?
The accretion disk forms when diffuse material is attracted to a massive central body, like a black hole. The flattened shape of the accretion disk is due to angular momentum, which dictates the particles' motion as they rotate around the black hole.
How do we calculate EPS?
To calculate earnings per share, take a company's net income and subtract from that preferred dividends. Then divide that amount by the average number of outstanding common shares.
What does accretion mean in real estate?
accretion. n. 1) in real estate, the increase of the actual land on a stream, lake or sea by the action of water which deposits soil upon the shoreline. Accretion is Mother Nature's little gift to a landowner.
How do you record accretion expenses?
Generally, accretion is recognized as an operating expense in the statement of income and often associated with an asset retirement obligation. The journal entry to record this cost would be a debit to accretion expense, offset by a credit to the ARO liability.
How is accretion formed?
Accretion is the process in which material from the outer plate and trench (during the periods of discontinuous subduction) is removed and added to the outer continental margin or by other mechanisms such as imbricate thrusting or a combination of folding and thrusting (Karig, 1974; Karig and Sherman, 1975).
What is the difference between accretion and amortization?
The adjustment type "Amortization" decreases cost and decreases income; the adjustment type "Accretion" increases cost and increases income.
What is the birth of the accretion dilution model?
The birth of the Accretion Dilution Model derives from stakeholders’ demand, specifically, from investors and company’s owners, who care a lot and are apprehensive about the company’s EPS. The model is performed by comparing the firm’s pre-acquisition EPS with its post-acquisition EPS to come to the conclusion of whether or not it would take steps to get closer to the M&A deal.
How to calculate EPS of acquirer?
Then, the EPS of Acquirer is derived by dividing $30,000 by $5,000, equal to 6, which is the EPS of Acquirer. Similarly, the Target Company’s EPS is 5.
How to calculate EPS?
The value of EPS can be derived by dividing the net income by outstanding shares of each firm.
Is a dilutive EPS better than a pro forma EPS?
A dilutive EPS following the acquisition is hardly a good deal to proceed with. While an accretive pro forma EPS would be a better choice. Investors and company’s owners might accept dilutive EPS in the first years after acquisition to wait for the turnaround in the next several years when the EPS becomes accretive.
Can you take premium into account in accretion dilution?
For the sake of simplicity, we don’t take the premium offered into account. The step-by-step guide to perform Accretion Dilution Model is presented with a quick example like below:
Is a M&A deal a dilute deal?
Otherwise, if the combined EPS is lower than the company pre-acquisition EPS, then the M&A deal is DILUTIVE.
Is EPS dilutive or accretive?
In several first years following the acquisition, the EPS can be dilutive, but then when the synergies kick in, revenue is likely to soar up due to a vast array of new products and services, redundant costs are eliminated and the functions are merged to maximize the efficiency, the EPS will become accretive. 4.
What is accretion dilution analysis?
Accretion/Dilution Analysis tries to answer an important question when it comes to corporate acquisitions – does the deal create or destroy value for shareholders of the buyer?
How to calculate accretion/dilution?
Accretion/Dilution Calculation: Pro-Forma EPS are divided by the standalone forecast EPS of the buyer and shown as a percentage. If the number is positive then the acquisition is accretive and positive for shareholders of the buyer; if it is negative the acquisition is dilutive and negative for shareholders. Subtracting the standalone forecast EPS of the buyer from the Pro-Forma EPS shows the accretion (positive) or dilution (negative) in dollar terms.
How long to analyze accretion?
In the past the Accretion/Dilution Analysis was mostly performed by just looking at the first year post-acquisition, but it is preferable to analyze a period of 3 to 5 years in order see the longer term impact of the transaction. This is especially so since many acquisitions are dilutive in the first year due to acquisition premiums paid and transaction expenses, but can become accretive thereafter if synergies are realized.
How to determine offer structure?
Determine Offer Structure: Percentage of offer that will be paid in cash and percentage that will be paid in shares of the buyer, and any amount of additional debt the buyer needs to take on in order to have enough cash in aggregate.
Is a 100% acquisition dilutive?
In the absence of synergies, an acquisition that is 100% paid for in shares will always be dilutive if the Price/Earnings (P/E) ratio of the target is higher than that of the buyer. Conversely an acquisition will be accretive if the P/E ration of the target is lower than that of the buyer. This fact has historically been a driver for much acquisition activity, with public companies buying privately held companies at lower multiples. Of course, this assumes that the P/E ratio of the combined entity will remain at the same level as that of the buyer which may not be the case and is a potential flaw with the Accretion/Dilution Analysis. After all, the target may very well deserve to have a lower P/E ratio and can bring down the P/E ratio of the buyer post-acquisition.
Is accretive acquisition bad?
An acquisition that is accretive will generally be perceived as creating value for the shareholders of the buyer. Nevertheless not all dilutive transactions are bad, for example the acquisition of a company with higher earnings growth than the buyer may push up its P/E ratio and over time increase its earnings significantly even if it is dilutive short-term. In fact, a study performed by McKinsey & Company argues that the accretive or dilutive aspects of acquisitions have a limited impact on share prices.
Why do people care about accretion / dilution?
This is the more complicated part of the story. Let’s start with another question: When evaluating a potential acquisition, what metrics / analyses are most important?
When is accretion / dilution most important?
As you’ve probably gathered, accretion / dilution is most important for public companies. Private companies rarely need to worry about per-share metrics, such as EPS. They often have heavily concentrated ownership and owners who are directly represented on the board of directors.
Why is EPS accretion important?
For these reasons, EPS accretion is often an essential metric for communicating a deal to the public markets. It’s an easy data point that management can refer to in order to show shareholders why a deal makes sense - why it leaves them better off. We’ll make more money for each of your shares, so your shares will be more valuable.
Is PF EPS accretive or accretive?
Since the PF EPS is greater than the standalone EPS, the deal is accretive. If the PF EPS is lower than the standalone EPS, the deal would be dilutive. Here’s an example:
Can you overpay a company in an accretive deal?
Accretive, but overpay - It’s very possible for one company to acquire another company in an accretive deal, and overpay. EPS accretion is usually a necessary, but never sufficient, condition for a good deal.
When is accretion/dilution analysis used?
However, it is widely used in analyzing the short term impact of the merger.
What is an accretion/dilution model?
In simple words, an accretion/dilution model measures the effect of the acquisition on the earnings per share of the acquiring company. This means that if the acquiring company had an EPS of $1 prior to the merger and has a proposed EPS of $1.25 after the merger, the merger is said to be accretive. On the other hand, if the EPS of the acquired entity reduces to $0.75, then the merger is said to be dilutive.
How Sources of Funding Affect Accretion and Dilution?
Acquisition transactions can be financed in many ways. For instance, there could be an all-stock deal . Alternatively, there could also be an all-cash deal . However, in most cases, part of the consideration is paid in cash, whereas the other part is paid in stock.
What is the strange thing about the accretive/dilutive model?
Firstly, it is a known fact that investment bankers do not place much trust in the earnings of any company. Instead, they focus on cash flow.
Is accretion a proxy for shareholder wealth creation?
However, it is important to know that accretion or dilution do not have much impact on the long term value creation. Therefore, using the accretion/dilution analysis as a proxy for shareholder wealth creation may not be an accurate thing to do.
What are accretion, dilution, and accrual?
In general, accretion and dilution are financial concepts representing an increase and decrease in value, respectively, and can apply to either a transaction or a bond. They refer to the fact that value is created or destroyed purely on paper.
Accretion dilution model: How to calculate it?
Accretion-dilution analysis is a process that uses financial statements as input, specifically focusing on the EPS figure in the income statement (IS).
Accretion dilution model: Sample interview questions
Getting through the interview process for a position in a mergers and acquisitions division (a field of investment banking (IB)) is often one of the most difficult processes. Besides the long application time, interviewers may ask you questions you weren't expecting or didn't prepare for, or some other complicated brain teasers.
M&A modeling course
To learn more about this concept and become a master at M&A modeling, please check out our M&A Modeling Course, which teaches you techniques and concepts like accretion dilution modeling with videos like the one below.
Overview
- Owners and managers of companies are periodically pitched merger and acquisition (M&A) dea…
Analyzing whether a specific M&A deal is a valuable one with long-term growth prospects is a complex undertaking that covers tremendous amounts of information and forecasting. An accretion/dilution analysis helps decision-makers in the M&A process determine whether or not … - An accretion/dilution analysis is a simple test used to evaluate the merit of a proposed merger o…
The accretion/dilution analysis determines if the post-transaction earnings per share (EPS) is increased or decreased.
What Is an Accretion/Dilution Analysis?
- An accretion/dilution analysis is a simple test, although there is some grunt work required. It is a…
For companies faced with M&A opportunities, many factors need to be considered, including the global impact of the arrangement, the likelihood of a quick and painless negotiation process, and the compatibility of the merging or acquiring companies. The dealmakers—the front-line worker…
Steps Involved in an Accretion/Dilution Analysis
- Estimate a pro forma net income for the combined entities.
Include conservative estimates of net income, taking into account prospective operational and financial synergies that are likely to result after the deal is finished. Some groups incorporate the last 12 months (LTM) as well as one- or two-year projections. Others include projected net inco…
The Bottom Line
- An accretion/dilution analysis is often seen as a proxy for whether or not a contemplated deal cr…
An accretion/dilution analysis is not a composite of the complete picture, nor does it contemplate how a newly-combined entity operates, adjusts, or takes advantage of opportunities years down the road.