In an all-stock deal, which approach helps assess accretion?

In an all-stock deal, which approach helps assess accretion?

• A. All-stock deals allow a shortcut to assess accretion
• B. You compute accretion by comparing the buyer's share price to the seller's book value
• C. All-cash deals always are accretive
• D. Accretion is irrelevant in all-stock deals

Answer: (A)

Accretion in all-stock deals can be checked quickly by looking at post-merger earnings per share using the exchange ratio. When you pay with stock, the number of shares outstanding rises, while the target brings its own earnings to the combined entity. You can assess impact with a simple projection: post-merger EPS equals (buyer net income plus target net income) divided by (buyer shares plus new shares issued). Here, new shares issued equal the exchange ratio times the target’s shares, so PostEPS = (NI_B + NI_T) / (S_B + R*T), where NI is net income, S_B is the buyer’s current shares, T is target shares, and R is the exchange ratio (new buyer shares per target share). Compare this PostEPS to the buyer’s pre-deal EPS (NI_B / S_B). If the post-deal EPS is higher, the deal is accretive; if lower, dilutive. This quick check works well because stock-funded deals directly tie the degree of dilution to how many new shares are issued and how much earnings the target adds, without needing cash-out or financing assumptions. The other statements aren’t correct because accretion is about EPS effects, not just share price versus book value; and not all all-stock deals are automatically accretive or accretion is irrelevant.

Accretion in all-stock deals can be checked quickly by looking at post-merger earnings per share using the exchange ratio. When you pay with stock, the number of shares outstanding rises, while the target brings its own earnings to the combined entity. You can assess impact with a simple projection: post-merger EPS equals (buyer net income plus target net income) divided by (buyer shares plus new shares issued). Here, new shares issued equal the exchange ratio times the target’s shares, so PostEPS = (NI_B + NI_T) / (S_B + R*T), where NI is net income, S_B is the buyer’s current shares, T is target shares, and R is the exchange ratio (new buyer shares per target share). Compare this PostEPS to the buyer’s pre-deal EPS (NI_B / S_B). If the post-deal EPS is higher, the deal is accretive; if lower, dilutive.

This quick check works well because stock-funded deals directly tie the degree of dilution to how many new shares are issued and how much earnings the target adds, without needing cash-out or financing assumptions. The other statements aren’t correct because accretion is about EPS effects, not just share price versus book value; and not all all-stock deals are automatically accretive or accretion is irrelevant.