Accretive

What Is Accretive?

In finance, "accretive" describes a transaction, usually a mergers and acquisitions deal, that makes a company's earnings per share (EPS) higher than they would otherwise be. A deal that lowers EPS is called dilutive, the opposite term.

How It Works

Accretion is usually measured by comparing the acquiring company's EPS before and after a deal. EPS is calculated as:

EPS = net income / shares outstanding

If the combined company's EPS after the deal is higher than its EPS before, the deal is accretive. If it is lower, the deal is dilutive. The calculation typically relies on projected figures, so the result depends on assumptions about future earnings, financing costs, and the number of new shares issued.

Analysts often build this comparison into a pro forma model, which estimates the combined company's results as if the deal had already closed. Accretion can come from several sources. For example, a buyer may acquire a company with a lower price-to-earnings ratio than its own, expect cost savings or synergies, or finance the purchase with debt whose interest cost is less than the earnings the target adds.

Example

Suppose Company A has net income of $100 million and 50 million shares outstanding, giving it EPS of $2.00. It agrees to buy Company B, which earns $12 million a year, by issuing 5 million new shares. The combined company would have net income of $112 million and 55 million shares, so EPS would be about $2.04. Because $2.04 is above $2.00, the deal would be accretive on these assumptions. The figures are hypothetical and simplified for illustration.

Why It Matters to Investors

Companies often describe deals as accretive to explain why they are good for shareholders, so the claim is worth examining. An accretive deal is not automatically a sound one. The result can depend on optimistic projections, heavy borrowing, or one-time items that flatter earnings. Accretion also ignores whether the price paid is reasonable relative to the business's value and the difficulty of combining two companies. Investors typically look at the assumptions behind the headline result as well as the result itself.