If a company's P/E ratio of 15 acquires a target with a P/E ratio of 10, what is the expected outcome of the deal?

When a company with a higher P/E ratio acquires a company with a lower P/E ratio, the expected outcome can indeed be accretive to the acquiring company. In this case, the acquiring company has a P/E ratio of 15, while the target has a P/E ratio of 10. This suggests that the acquiring company's earnings are valued more highly relative to its share price compared to the target's earnings.

In practice, if the acquiring company buys the target, it can create a scenario where the overall earnings generated from the combination increase the earnings per share (EPS) for the acquirer after the deal is completed. This is possible because the lower P/E ratio of the target implies that it contributes earnings at a more favorable rate relative to its purchase price than the acquirer's current earnings metrics.

The transaction can be accretive if the combined entity's earnings exceed the previous earnings of the acquirer alone on a per-share basis, leading to increased shareholder value. Thus, the potential for the deal to be accretive is a key point in evaluating the benefits of acquiring a company with a lower P/E ratio.

This scenario illustrates why the outcome can be favorable, based on the relative valuations represented by the P/E ratios of