What does it mean for a deal to be accretive vs. dilutive?
Answer
A deal is accretive if it increases the acquirer's earnings per share (EPS) post-close, and dilutive if it decreases EPS. For stock deals, accretion/dilution depends on whether the acquirer's P/E ratio is higher than the deal P/E (adjusted for synergies). Cash deals funded by debt are generally accretive if the target's after-tax earnings yield exceeds the after-tax cost of debt.
Why interviewers ask this
Accretion/dilution analysis is a core M&A concept. The intuition for stock deals: if you pay 15x EPS for a company using stock trading at 20x, you're issuing stock at a 5% earnings yield to buy earnings at a 6.7% yield — accretive. The reverse is dilutive. Synergies can flip a deal from dilutive to accretive. Always caveat: short-term EPS accretion doesn't necessarily mean value creation.