Direct answer. Accretion/dilution measures whether a deal increases or decreases the buyer's pro forma EPS versus standalone. The math is small. The interview test is whether you can reason about financing mix and P/E intuition under pressure.
Bankers do not test the formula. They test if you can size the answer in 60 seconds without a model.
Definition
Pro forma EPS = (Buyer NI + Seller NI + after-tax synergies − after-tax interest on new debt − foregone after-tax interest on cash − after-tax intangible amortization) / pro forma diluted shares. Accretion if pro forma EPS > standalone EPS.
Formula
Memorize the structure, not a rigid line.
(NI_buyer + NI_seller + Synergies×(1−t) − Interest×(1−t) − Foregone_interest×(1−t) − Amort×(1−t)) / Pro forma shares
Financing Mix Intuition
Three knobs.
- Cash. Buyer earns ~risk-free yield after tax. Replacing cash with seller earnings is usually accretive.
- Debt. Compare seller earnings yield (1/PE) to after-tax cost of debt. If seller yield is higher, accretive.
- Stock. Compare buyer P/E to seller P/E. Buyer P/E > Seller P/E ⇒ accretive; Buyer P/E < Seller P/E ⇒ dilutive.
Why Bankers Care
Accretion/dilution is the first slide CFOs read. Drill it inside M&A interview questions and stress-test it live in an investment banking mock interview.
Interview Answer Framework
Use this every time.
- 1. State the test. Define pro forma EPS vs standalone.
- 2. Walk financing mix. Cash, debt, stock — name the yield each contributes.
- 3. Layer synergies. After-tax, phased in.
- 4. Layer amortization. Of identifiable intangibles, after tax.
- 5. Conclude. Direction first, then magnitude.
Numeric Example
Illustrative.
| Item | Value |
|---|---|
| Buyer net income | $500m |
| Seller net income | $80m |
| Purchase price | $1,200m |
| Financing | 50% debt @ 6% / 50% stock |
| Buyer share price | $50 |
| Buyer shares outstanding | 200m |
| New shares issued | 12m ($600m / $50) |
| After-tax interest on new debt | $600m × 6% × (1−25%) = $27m |
| Pro forma NI | 500 + 80 − 27 = $553m |
| Pro forma shares | 212m |
| Pro forma EPS | ~$2.61 |
| Standalone EPS | $500m / 200m = $2.50 |
| Result | Accretive (~+4%) |
Common Traps
Where candidates lose points.
- Forgetting after-tax. Interest, synergies and amortization are all after tax.
- Ignoring foregone interest. Cash funded deals lose the yield the cash was earning.
- Using book P/E. Use forward P/E and adjusted earnings for cleanest signal.
- Skipping share count math. New shares issued = consideration / buyer share price.
- Treating goodwill as amortized. US GAAP does not amortize goodwill.
How to Practice This Concept
Run three accretion/dilution problems out loud, varying financing mix. For sponsor mechanics, see paper LBO interview practice. Then pressure-test live in an investment banking mock interview.
What Candidates Get Wrong
- Modeling instead of reasoning. Bankers want a 60-second sized answer first.
- Forgetting tax. Every earnings adjustment is after tax.
- Skipping the P/E test. It is the fastest first answer.
- Confusing goodwill and intangibles. Goodwill not amortized; identifiable intangibles are.
Real Interview Insight
Common failure: candidate jumps to a model. Strong answer: 'Buyer trades 20x, seller 12x — all stock would be dilutive; with 50% debt at after-tax cost ~4.5%, seller yield ~8% — likely accretive.' Then size it. Speed and intuition first.
Stop reading. Run the math live.
Reading the framework is not the same as running it cold. Practice now.
Frequently Asked Questions
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