What is the point of carrying out an accretion/dilution analysis?
I'm reading everywhere that the P/E gives no indication of the value creation of a deal.
So I am wondering, what is it really for? Why should I, as a banker, be interested in calculating it (other than knowing that my P/E is going to fall for my shareholders, etc.)?
Thanks
| +67 | Any tips for sleeping well? | 36 | 4h |
| +50 | Wealthy Parents / Jaded | 13 | 12h |
| +40 | Background check issue IB Full Time | 21 | 11h |
| +36 | Venezuela Debt Restructuring - LAZ vs CVP | 12 | 3h |
| +34 | How are hours rn for SA (interns) | 21 | 1h |
| +28 | Q dealflow slowdown | 22 | 2d |
| +25 | HL vs WB | 19 | 15h |
| +24 | Investment Banking in Mexico | 6 | 2h |
| +23 | UBS GIG, LevFin, FSG Interns working Sundays and 85 hour weeks their first week? | 11 | 16h |
| +22 | MM bottom bucket bonus | 9 | 13h |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
You kinda answered it, and it's because public market perception is everything.
Public markets are "dumb" and care about EPS. If I'm a shareholder of your company and my Earnings Per Share goes down after you do this transaction, I'll perceive that as a bad deal for me and invest in a better stock. That means your stock price will go down, and you won't be able to raise as much capital in the future from selling shares. Which isn't ideal.
Of course, this is super simplified and it doesn't always pan out this way...but it's the basic rationale for why accretion dilution is always included. It's also not a dealbreaker for many reasons including the ones you mentioned. EPS isn't the end-all be-all. If it's accretive, that's great. If not, then the buyer (with the help of their trusty bankers!) needs to come up with clear, solid rationale for why the transaction creates value long-term in a way that their investors will respond positively to.
Take it back to basics. Pretend, for simplicity, that earnings really represents cash earnings, and that a company pays out every dollar of earnings as a dividend. If I own a share in a company that pays me a $5 dividend off of $5 EPS, and then the company does a deal that is dilutive, so now each share only has access to EPS of $4, which means a $4 dividend, then my share just lost 20% of its value. Unless, for some reason, that $4 became less risky now, the deal is near-term dilutive but long-term accretive, etc... But ultimately, any capital allocation decision should come down to whether it creates additional value for shareholders on a per share basis.
Est beatae laudantium praesentium assumenda dolore earum. Vel commodi voluptatum consequatur rerum quibusdam aut et nesciunt. Et non ut qui deserunt tempore qui atque. Mollitia repellendus hic sapiente nam et ut. Modi facilis aut dolorem rerum voluptatem sed ut. Magni consequatur voluptatibus commodi deserunt voluptates.
Quia repellat voluptatem et nesciunt excepturi. Tenetur impedit ut ullam recusandae atque. Delectus omnis recusandae optio ex. Voluptatem atque consequatur voluptatem maxime labore blanditiis.
Totam vero et incidunt id natus. Autem delectus aut quia blanditiis facere. Ipsa qui iste impedit temporibus nemo omnis.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...