Accretive/Dilutive
if a transaction IS NOT all stock (can't just compare P/E), how would we find out if it's Accretive or dilutive?
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owned on interview Q? it should be on this site... or get the M&I guide.
I got this qusetion a couple of times---- i think the key is recognizing that the P/E rule only works for all equity deal. If transaction is made in Cash/Debt, P/E doesn;t matter at all. As for how it does work, i think it gets a lot more complicated and honestly, unless your interviewer is a real bitch/ you had hardcore finance experience before, no one's gonna expect you to know this.
FYI: M&I doesn't give the answer.
haven't gotten it before but i fear i will. it's not in the M&I guide..
Here's a quick-and-dirty answer that should get you through an interview question:
You need to build out a merger model and run an accretion/dilution analysis on the EPS. If a transaction is made with debt, the additional debt on the pro forma balance sheet is going to increase interest expense, which will decrease EPS. If made with cash, there is a foregone cash interest income that needs to be taken into consideration. In a "strategic" transaction (where an A-D analysis would make sense), it is often a combination of the above, but just know that the accretion/dilution of the deal will depend on the consideration paid because of the above reasons.
thanks for the explanation jimbrown.
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