Merger Accretion/Dilution Calculator
Merger accretion and dilution: does an acquisition raise (accretion) or lower (dilution) the acquirer's earnings per share? Free, no sign-up, with the formulas shown. Inputs stay in your browser.
Change one input at a time and watch what moves. That's how you learn the model.
Accretion / dilution
Does an acquisition raise or lower the acquirer's earnings per share?
Learn more: what is accretion/dilution, how to read it and common mistakes
What is accretion/dilution analysis?
When one company buys another, its earnings per share (EPS) change. The buyer gains the target's profit, but it also pays for the target, either with cash (here, new debt that carries interest) or by issuing new shares (more shares to divide profit across). If EPS after the deal is higher than before, the deal is accretive; if it is lower, it is dilutive. The analysis compares the buyer's standalone EPS with its pro forma EPS, meaning the combined figure as if the deal had already happened.
When do you use it?
It is one of the first tests investment bankers run on a listed acquirer's M&A deal, because shareholders and analysts watch EPS closely. Boards use it to choose how to pay (cash, shares or a mix) and how much premium they can afford. Private equity rarely uses EPS, but the same trade-off between purchase price, financing cost and synergies appears in every deal.
How to read the output
With the example inputs, the buyer earns 500 on 200 shares, a standalone EPS of 2.50. It offers a 30% premium for a target earning 60, paying half in new debt and half in new shares, and expects 20 of pre-tax synergies. Pro forma EPS is 2.62, so the deal is 4.9% accretive. The output also shows the offer price, total equity purchase price (975), the new shares issued and the after-tax interest cost. Synergies needed to break even tells you how much cost saving the deal needs to avoid dilution; here it reads "already accretive", so it works even without synergies.
A useful rule of thumb: paying in shares is accretive when the buyer's price-to-earnings ratio is higher than the P/E it pays for the target. Paying with debt is accretive when the after-tax interest rate is lower than the target's earnings yield (earnings divided by price). The sensitivity table shows the result for offer premiums 10 points lower and higher (rows) and cash shares 25 points lower and higher (columns). In the example, accretion ranges from 2.9% to 6.9%: a lower premium and more cash, since debt is cheap here, both help.
Common mistakes
- Treating accretion as value creation. A deal can raise EPS and still destroy value if the price is too high.
- Counting synergies too early or too fully. Savings take years to arrive and often cost money to achieve.
- Mixing share counts and money units. Shares and net income should use the same unit (both in millions).
- Using the offer price for the target's share price input. Enter the undisturbed price and set the premium separately.
Limitations
The model looks at one year of net income only. It ignores purchase price accounting (new amortisation of intangibles), transaction and integration costs, interest lost on cash used, the target's existing debt, and any change in the buyer's share price after the announcement. It says nothing about the long-term strategic case.
FAQ
- Is accretive always good?
- No. It is a short-term accounting test, not a valuation.
- Why does more cash make the deal more accretive here?
- The after-tax cost of debt (3.75%) is lower than the earnings yield on the target at the offer price (about 6.2%).
- What if pro forma EPS is lower?
- The deal is dilutive. Buyers sometimes accept that if they expect EPS to recover once synergies arrive.
Educational use only. Not financial advice. Exact formulas: see the Methodology page