Accretion Dilution Analysis in Excel

Accretion dilution analysis tells an acquirer whether a deal raises or lowers its earnings per share. You combine the two companies' net income, adjust for the cost of financing the purchase with cash, debt, or stock, and divide combined net income by the new share count. If pro forma EPS is higher than standalone EPS the deal is accretive; if lower it is dilutive.

What accretion dilution measures

Accretion dilution analysis compares the acquirer's earnings per share before a deal with its pro forma earnings per share after the deal closes. It is a first screen on whether an acquisition helps or hurts reported per share earnings, which markets watch closely.

The analysis is fundamentally about two competing effects. Adding the target's earnings raises combined net income, but the way the deal is paid for, with cash that loses interest income, debt that adds interest expense, or new shares that dilute ownership, has its own cost. EPS rises only if the added earnings outweigh the financing cost.

Build the combined EPS step by step

The build combines two income statements and adjusts for financing. This example acquires a target for stock and debt and tests the effect on EPS.

1. Start with acquirer standalone net income and the target's net income.
2. Subtract after-tax new debt interest: =debt_used * interest_rate * (1 - tax_rate).
3. Subtract after-tax foregone interest on cash used: =cash_used * cash_yield * (1 - tax_rate).
4. Add the combined figure to get pro forma net income.
5. Compute new shares issued: =stock_consideration / acquirer_share_price.
6. Divide pro forma net income by acquirer_shares + new_shares to get pro forma EPS.

Compare pro forma EPS of 5.13 to the acquirer's standalone EPS to judge whether the deal is accretive.

The financing mix and the accretive test

The financing mix decides the cost side. Cash consideration sacrifices the interest the acquirer would have earned on that cash. Debt consideration adds interest expense. Stock consideration issues new shares, which dilutes EPS even though it adds no interest cost. Each effect is taken after tax where it touches the income statement.

The test itself is one comparison.

• New shares from stock: =stock_consideration / acquirer_share_price.
• Debt interest, after tax: =debt_used * interest_rate * (1 - tax_rate).
• Foregone cash interest, after tax: =cash_used * cash_yield * (1 - tax_rate).
• Pro forma EPS: =pro_forma_net_income / (acquirer_shares + new_shares).
• Accretive test: if pro_forma_EPS > standalone_EPS the deal is accretive, otherwise it is dilutive.

Pitfalls and what reviewers check

The most common error is forgetting to tax effect the financing adjustments. Interest expense and foregone interest income both hit pre-tax income, so they must be multiplied by one minus the tax rate before they reach net income. Skipping this overstates the deal's impact.

Hardcoded synergy or financing numbers are a frequent red flag. The new share count should be driven by the stock consideration and the acquirer's price, not typed in, and interest should be driven by the debt amount and rate. Keep each adjustment traceable to an input.

Reviewers also confirm the share count reflects only shares actually issued for the stock portion, that the analysis matches the stated cash, debt, and stock mix, and that standalone and pro forma EPS use a consistent share basis so the comparison is apples to apples.