Dilutive
M&A / Merger ModelA deal that reduces the acquirer's pro forma earnings per share.
Also written: dilution
A transaction is dilutive when the earnings acquired are worth less than the cost of acquiring them, so pro forma EPS falls below the standalone figure.
It happens when the acquirer pays a high multiple relative to its own, funds with equity issued at a lower earnings yield than the target's return, or takes on financing costs that exceed the earnings brought in. Purchase accounting can add to it through amortisation of newly recognised intangibles.
Dilution is not a reason to reject a deal, though it is often treated as one. A business acquired for its growth may be dilutive for two years and strongly accretive afterwards, and rejecting it on year one EPS is short termism dressed as discipline.
What matters is the reason and the duration. Boards routinely accept dilution where the strategic case is clear, and disclose the year in which the deal is expected to turn accretive.
Worked example
An acquirer on 12x P/E buys a target on 20x entirely in stock. It gives up an 8.3% earnings yield to pick up 5.0%.
Picking up less than you give up means EPS falls, regardless of how strategic the deal is.
Adding 30 a year of amortisation from newly recognised intangibles makes it worse on a reported basis, though that charge is non cash and usually excluded from the adjusted figures the acquirer guides to.