What does accretion/dilution analysis measure in MandA modeling?

Accretion/dilution analysis is a critical component of M&A modeling that specifically measures the impact of an acquisition on the acquiring company's earnings per share (EPS). When a company considers acquiring another business, it evaluates whether the deal will increase (accretive) or decrease (dilutive) its EPS.

The analysis involves comparing the EPS before and after the acquisition, taking into account factors such as the purchase price of the target, the financing structure of the deal (cash, stock, debt), and the projected earnings from the target company. If the EPS post-acquisition is higher than pre-acquisition, the transaction is deemed accretive, signaling that the acquisition is expected to generate more earnings for shareholders. Conversely, if it is lower, the deal is considered dilutive, indicating a potential negative effect on shareholder value.

This analysis provides investors and management with insights into how the acquisition will affect profitability on a per-share basis, which is crucial for decision-making regarding whether to pursue the acquisition.