Accretion and dilution - what does it mean high level
I'm a bit confused on the concept of accretion and dilution. Basically, what I can understand is that an M&A deal is considered "accretive" if post-merger the earnings of the company are higher than previously, and it's considered "dilutive" if the earnings are lower. But wouldn't pretty much any M&A transaction be accretive if the earnings of both companies are positive? Also, from who's perspective do we think of accretion/dilution? What purpose does the model serve?? Thanks in advance.
For the most part, all of the deals you read about will be accretive short term. A general rule of thumb is that in an all-stock deal, if a buyer has a PE multiple greater than the target company than the deal will always be accretive. Once you look at different mixes of debt/cash, then it gets trickier to measure and one would need to look at the foregone interest on cash and the interest rate of the debt being paid.
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