What does accretion/dilution analysis evaluate in the context of mergers?

Accretion/dilution analysis is a financial assessment used primarily in the context of mergers and acquisitions to evaluate how a transaction will impact a company’s earnings per share (EPS). This analysis specifically examines whether the merger will increase (accretion) or decrease (dilution) the acquiring company's EPS post-transaction.

When a company acquires another, the combined earnings of the two entities will affect the overall EPS. If the new earnings per share after the merger are higher than the original EPS of the acquiring firm, it indicates that the merger has a positive impact on shareholder value. Conversely, if the EPS is lower after the merger, it signifies dilution, meaning shareholders will own a smaller portion of the company’s earnings.

This analysis is critical for investors and management as it provides insights into the financial viability of the merger and guides decisions regarding whether to proceed with the transaction. The focus on EPS allows stakeholders to assess how the merger aligns with their financial interests and strategic goals.