A buyer with a higher P/E acquiring a seller with a lower P/E: is this accretive or dilutive, and under what condition?

A buyer with a higher P/E acquiring a seller with a lower P/E: is this accretive or dilutive, and under what condition?

• A. Cannot be determined unless the deal is all-stock
• B. Always accretive in all-cash deals
• C. Always dilutive in all-debt deals
• D. Always accretive because higher P/E paid with stock lowers cost

Answer: (A)

Accretion or dilution is about whether the combined company’s earnings per share rise or fall after the merger. Valuing the buyer at a higher P/E and the seller at a lower P/E doesn’t by itself fix how many new shares will be issued, how much cash or debt will be used, or what the merged earnings will look like. Those financing details determine the post‑deal EPS, so you can’t tell from P/E levels alone whether the deal will be accretive or dilutive. The only situation where you can determine the outcome with the information given is when the deal is financed entirely with stock. In an all‑stock deal, the transaction price is paid entirely with shares, so the accretion/dilution outcome depends on the exchange ratio and the relative earnings of the two companies. Under that condition you can assess whether the new share count and the added earnings push EPS up or down. Outside of that all‑stock case, you’d need additional details about cash or debt financing and other adjustments to judge accretion or dilution.

Accretion or dilution is about whether the combined company’s earnings per share rise or fall after the merger. Valuing the buyer at a higher P/E and the seller at a lower P/E doesn’t by itself fix how many new shares will be issued, how much cash or debt will be used, or what the merged earnings will look like. Those financing details determine the post‑deal EPS, so you can’t tell from P/E levels alone whether the deal will be accretive or dilutive.

The only situation where you can determine the outcome with the information given is when the deal is financed entirely with stock. In an all‑stock deal, the transaction price is paid entirely with shares, so the accretion/dilution outcome depends on the exchange ratio and the relative earnings of the two companies. Under that condition you can assess whether the new share count and the added earnings push EPS up or down. Outside of that all‑stock case, you’d need additional details about cash or debt financing and other adjustments to judge accretion or dilution.