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You�ve probably heard these terms, but what exactly is the difference between accretive and dilutive mergers ?
A merger or acquisition is accretive when the earnings per share of the acquiring company (or the new one, result of the deal) increases, a dilutive merger occurs when the earnings per share decrease.
But how does this happen? Let�s take a simple example.
Suppose company A, which has 1000 shares, an estimated net earning of 2000$, is acquiring company B which has 1000 $ in net earnings.
Let�s also assume that A decided to convert company B into 1000 shares also.
Before the acquisition, company A net earnings per share were 2$.
After the transaction, the new earning per share figure is: (2000+1000)$/(1000+1000)shares which gives 1.5 $ per share.
Clearly, the acquisition is dilutive in this case since the earnings per share declined.
Let�s now assume that instead of converting company B into 1000 shares, company A decides to convert it into 250 shares.
The earnings per share will be (2000+1000)$/(1000+250)shares, which is 2.4 $ per share. In this scenario, the merger is accretive.
In conclusion, a merger is accretive or dilutive depending on how the actors of both companies are structuring the deal.
There is also one simple method to quickly recognize an accretive or dilutive merger by observing the price to earning ratios (PER) of the two companies before the deal:
Suppose company A with PER A is acquiring company B with PER B.
The merger is accretive if PER A is higher than PER B, it is dilutive if PER A is lower than PER B.
17/08/2005 Imad KARAM