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Finance · level 3

Accretion / dilution

In a share-for-share deal, forget the model: invert both P/Es. If the target's earnings yield beats your own cost of paper, the deal adds to EPS.

Theory: Valuation

Worked example: All-stock deal: acquirer P/E 18×, target P/E 10×. Yield pick-up in percentage points?

target yield10%
acquirer yield5.56%
pick-up4.44 pts

Step by step

  1. 1

    Flip the multiples into yields

    1/10 = 10%, 1/18 = 5.56%

  2. 2

    Difference

    10% − 5.56% = 4.44 pts

  3. 3

    Rule

    Buying a lower P/E with a higher-P/E currency is accretive to EPS.

All-stock deal: acquirer P/E 18×, target P/E 10×. Yield pick-up in percentage points? = 4.44

The theory behind it

Intuition

A share-for-share deal is accretive when the acquirer's P/E is higher than the effective P/E paid — you are buying earnings more cheaply than your own.

Common pitfalls

  • ×Ignoring synergies and financing costs.
  • ×Comparing EPS without adjusting the new share count.

In the interview

M&A rounds: the one-line test before the model exists.