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Series 79 practice questionmediumAccretion/Dilution Analysis

An acquirer with a P/E ratio of 20x acquires a target with a P/E ratio of 12x in an all-stock transaction at the target's unaffected market value, with no control premium. Ignoring synergies, the deal is most likely:

  1. ADilutive to the acquirer's EPS
  2. BAccretive to the acquirer's EPS✓ Correct answer
  3. CNeutral to the acquirer's EPS
  4. DCannot be determined without additional information
Explanation

Why B — Accretive to the acquirer's EPS

In an all-stock deal, if the acquirer's P/E ratio is higher than the target's P/E ratio, the transaction will generally be accretive to the acquirer's EPS. This is because the acquirer is effectively buying earnings at a cheaper multiple (12x) than what the market values its own earnings at (20x). The acquirer issues relatively fewer shares (valued at a higher multiple) to acquire the target's earnings, resulting in net EPS accretion.

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