Accretion

Definition

Accretion, in the context of M&A, refers to the increase in earnings per share (EPS) of the acquiring company following a transaction. This occurs when the additional earnings generated by the acquisition exceed the transaction costs, creating immediate value for shareholders.

Calculation of Accretion

To determine whether an M&A transaction is accretive, analysts compare the EPS of the acquiring company before and after the acquisition. A simple method involves dividing the combined net income of both companies by the new total number of outstanding shares:

Accretion = (Net Income of Acquirer + Net Income of Target) / Total Number of Shares After Transaction

Practical Significance

Accretive transactions are attractive to buyers as they increase shareholder value. However, companies should not focus solely on accretion but also consider strategic alignment, cultural fit, and long-term synergies.