I’m obviously exaggerating (slightly) but I’m astonished that anyone takes this analysis seriously. The stock market certainly doesn’t give a shit that your heavily waterboarded numbers say that your deal is a good idea - most buyer share prices tank following deal announcements.
Basically every deal paid for with cash will be accretive (it’s basically impossible to have incremental net interest expense > the boost in pf pretax income) even if you’re overpaying by like 500x and destroying massive amounts of shareholder value.
Once upon a time we amortized the gigantic new goodwill from mergers such that overpaying in cash deals had real consequences for pf earnings. but now we don’t.
we should probably look at economic value added (ie returns from the acquisition minus buyer WACC times purchase price) instead of accretion/dilution.
please tell me why i’m wrong though
You're not wrong
All of these metrics are analyzed when a buyer is deciding to do a deal or not
Also, not all deals are paid for using 100% cash so then the metric does matter...
I agree acc/dil never matters more than incremental FCF per share
But shareholders want to only do deals that will be accretive because that is the "headline" number
I stand by this position btw
Acc / dil concept is closely connected to the idea that if faced with a choice buying a share of a company A that generates $1 per share or company B that generates $0.5 per share, we are better off choosing company A, all else equal
If I remember correctly, Joel Greenblatt uses this example to explain fundamentals of stock market investing
Don’t see why it’s stupid to be honest.. what you may be referring to as stupid is the continuous quantitative easing, which makes interest rates so low that ultimately in most cases using cash results in accretive acquisition - that is a different story though
I laid it out fairly clearly I think. The analysis fails to consider whether the buyer is overpaying for the target.
Also the sensitivity of accretion/dilution to the form of consideration almost renders it worthless. Even a fantastic business you buy at a great price could be dilutive if paid for with stock. By contrast, you could use all cash or low interest debt to overpay for an awful business and have a model tell you its accretive
The fact that you no longer amortize goodwill exacerbates the issue.
My point is that acc / dil as a stand-alone analysis isn’t necessarily stupid but I agree that it is better used in a package where one also looks at the spread between acquisition IRR and WACC etc
Accretion dilution or EPS yes maybe but can use makeshift metrics like FCF or EBITDA - Interest expense - capex and see if it’s will accretive. I’d venture to say it can have value there from a basic standpoint. Don’t really think anybody really spends too much time thinking about it much though.
I think most people would agree with you, nobody actually makes m&a decisions based on acc/dil but because it's an important signal to shareholders/investors it is almost always presented alongside a projected npv-positive acquisition.
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