Accretion

In a transaction context, accretion describes the increase in earnings per share that arises at the acquirer after a takeover. A combination is accretive where earnings per share after completion exceed what the acquirer would have reported without the transaction. Arithmetically, the additional earnings contribution after financing costs and other transaction effects must outweigh the impact of newly issued shares. In a cash deal the comparison between the target's earnings yield and the after-tax interest rate decides the outcome, while in a share deal it is the comparison of both companies' price-earnings ratios.

An acquirer with a high ratio can, under simplified assumptions, acquire a target with a lower ratio on an accretive basis, without any economic benefit necessarily following. That is precisely the limit of the measure: it captures an accounting effect on a period figure, not a contribution to value. The term should be distinguished from accretion/dilution analysis, which has its own entry in this glossary and describes the full model used to project that effect over several years. Accretion is the outcome, the analysis is the route to it. In accounting the same English term is also used for the unwinding of discount on long-term provisions and discounted liabilities, that is the periodic increase in a present value.

Which meaning applies follows from the context, which is why investor materials regularly refer expressly to earnings per share. A simple example shows the mechanics. If a company on a price-earnings ratio of 20 acquires a target at 12 times entirely in cash, the target's earnings yield is around 8.3 percent. That is above an after-tax cost of debt of 5 percent, so earnings per share rise if other transaction effects are ignored. Where consideration is paid in shares the calculation changes, because the acquirer issues new equity and the effect then also depends on the number of newly issued shares.