Dilution

Definition

Dilution occurs in the M&A context when a transaction leads to a decrease in the acquiring company's earnings per share (EPS). This can happen if the acquisition costs exceed the additional earnings or if new shares are issued, reducing the existing shareholders' proportional share in the company's earnings.

Causes of Dilution

• High Purchase Price: When the buyer pays an excessive price that is not justified by future earnings.
• Equity-Based Financing: Issuing new shares to finance the acquisition can dilute the existing shareholders' share of the earnings.

Avoiding Dilution

Companies can avoid dilution by conducting thorough due diligence, identifying realistic synergy potential, and implementing a well-thought-out financing strategy.