Lecture 5 Stack 3: Evaluation of Accretion/Dilution

Mis-match of use of accretion and dilution

Despite its widespread use, accretion and dilution analysis is an accounting-based measure and does not necessarily indicate value creation.

Focus and Flaws of Accretion and Dilution

Accretion focuses on short-term earnings per share and ignores important factors such as risk, the timing of cash flows, the time value of money, integration costs, and the cost of capital.

Transaction peril of Accretion and Dilution

As a result, a transaction may be accretive while destroying shareholder value, or dilutive while creating value.

Assessment of Accretion and Dilution

Accretion analysis should therefore be viewed as an initial screening tool rather than a decision rule, with value creation ultimately determined by whether the transaction generates positive net present value and earns returns above the cost of capital.