Significance of accretion/dilution?
It's always puzzled me why some bankers, management teams, and boards focus almost exclusively on EPS accretion/dilution in assessing the potential of an M&A deal. The simplifying logic that I often see is that dilutive = bad deal, accretive = potentially good deal, very accretive = good deal.
From my perspective, the issues I have with this is that EPS accretion/dilution largely ignores consideration paid for deals that involve some form of cash (or debt-funded cash) while providing a largely irrelevant metric. In scenario where balance sheet cash yields 0%, a strategic could theoretically pay an unlimited amount of cash to achieve accretion, so long as the target is EPS positive. Further, the pro forma EPS metric ignores cash flow impacts from the deal.
Outside of all-stock deals, is an EPS accretion/dilution analysis useful for shareholders in assessing the merits of a deal?
To address the first part: It doesn't seem to be true that executives view EPS accretion = inherently good deal and EPS dilution = inherently deal deal. Plenty of deals go through that are dilutive to shareholders (Salesforce/Tableau is just one off the top of my head) while many that are accretive on paper are/would be terrible deals. There's a lot of qualitative factors that go into deal making.
Mature public companies typically trade on multiples of earnings (i.e. P/E ratios). If EPS goes up and I am valued at the same multiple, stock price goes up.
This. It's a shareholder thing - accretive deals are much easier to defend in a shareholder vote than dilutive deals.
Accretion is often shown on a cash flow basis, as well as EPS, so it's not entirely useless.
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