Accretive Acquisition

What is an 'Accretive Acquisition'

An accretive acquisition will increase the acquiring company's earnings per share (EPS). Accretive acquisitions tend to be favorable for the company's market price, because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS. As a general rule, an accretive merger or acquisition occurs when the price-earnings (P/E) ratio of the acquiring firm is greater than that of the target firm.

BREAKING DOWN 'Accretive Acquisition'

An accretive acquisition increases synergies between the acquired and the acquirer. A synergy occurs when the combination of two organizations produce a combined value that is greater than the sum of the separate parts. So, value in an accretive acquisition is generated because the buyer of a smaller company is able to add the acquired business's pro-forma EBITDA/earnings ratio to its own EBITDA/earnings ratio. If the acquisition is done correctly, the purchasing company has a higher enterprise value (EV)/EBITDA multiple, and the addition of the acquired company increases the total value of the combined entity.

An Example of an Accretive Acquisition

There are many cases where an established company seeks to add value to its shareholders through a strategic acquisition. Unlike an acquisition that is conducted due to research and development or product acquisition purposes, as was the case with Facebook's purchase of Oculus Rift, an accretive acquisition immediately increases the value of the acquiring company's stock.

If, for example, a large, public technology company wants to increase its EPS immediately, thus increasing its share price, it would look to acquire a smaller technology company with a higher EPS. If the larger company had an EPS of $2 and calculated that, if it acquired a smaller company with an EPS of $2.50, it would realize a combined pro-forma EPS of $2.15, the gross value of the acquisition would be 15%. If the cost of acquiring the company is 10 cents per share, is $0.10, the net benefit is positive.

Potential Drawbacks of an Accretive Acquisition

However, since pro-forma financial statements and 12- to 24-month forecasts are used to derive the potential accretive value of the acquisition, synergies are not guaranteed. In fact, the only way to realize the added value of combining the firms is to integrate both companies effectively and efficiently, so there are no lost benefits. Often, the combination of the firms fails and the resulting entity realizes an EPS that falls short of expectations, causing the firm to lose overall value.

RELATED TERMS
  1. Accretive

    The process of accretion, which is the growth or increase by ...
  2. Dilutive Acquisition

    A takeover transaction that will decrease the acquirer's earnings ...
  3. Acquisition Premium

    The difference between the estimated real value of a company ...
  4. Acquisition

    A corporate action in which a company buys most, if not all, ...
  5. Mergers And Acquisitions - M&A

    A general term used to refer to the consolidation of companies. ...
  6. Horizontal Acquisition

    The acquisition of one company by another in the same industry. ...
Related Articles
  1. Markets

    What Does Accretive Mean?

    In the business world, accretive most often to refers to additional growth from outside sources.
  2. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller. We tell you what to look for.
  3. Markets

    What's an Acquisition?

    In corporate terms, an acquisition is the purchase of a company or the division of a company. Some acquisitions are paid in cash, while others are paid with a combination of cash and the acquiring ...
  4. Investing

    What Happens To The Stock Prices Of Two Companies Involved In An Acquisition?

    When one firm buys another, the effect is predictable. The acquiring company’s stock falls in value, while the target company’s climbs.
  5. Investing

    Accretion / Dilution Analysis: A Merger Mystery

    This analysis tool is an effective way to value mergers and acquisitions. The deal's on the table, but should you sign the papers?
  6. Investing

    Key Players In Mergers And Acquisitions

    Strategic acquisition is becoming a part of doing business. Discover the different types of investor groups involved.
  7. Investing

    Analyzing An Acquisition Announcement

    These deals can make or break investors' returns. Find out how to tell the difference.
  8. Financial Advisor

    Top Tips for Buying a Financial Advisory Practice

    When acquiring a new financial advisory practice, make sure that your game plan avoids these acquisition missteps.
  9. Investing

    What are Acquisition Costs?

    A company can recognize acquisition costs as those costs used to buy property and equipment.
  10. Investing

    What Merger And Acquisition Firms Do

    The merger or acquisition process can be intimidating. This is why merger and acquisition firms step in to facilitate the process.
RELATED FAQS
  1. What are some common accretive transactions?

    Find out about accretive transactions and how analysts determine whether or not an acquisition is accretive or dilutive by ... Read Answer >>
  2. What is the difference between an accretive transaction and a dilutive transaction?

    Read about the differences between an accretive and dilutive financial transaction, particularly as it pertains to a mergers ... Read Answer >>
  3. What is considered an accretive acquisition?

    Learn about accretion and dilution in mergers and acquisitions. What makes a deal accretive, and how is earnings per share ... Read Answer >>
  4. What is the difference between an accretive and a dilutive merger?

    Learn how to distinguish between a merger and acquisition (M&A) deal that is accretive and one that is dilutive, and why ... Read Answer >>
  5. What happens to the stock prices of two companies involved in an acquisition?

    When a firm acquires another entity, there usually is a predictable short-term effect on the stock price of both companies. ... Read Answer >>
  6. What is a tuck-in acquisition?

    A tuck-in acquisition, often referred to as a "bolt-on acquisition", is a type of acquisition in which the acquiring company ... Read Answer >>
Hot Definitions
  1. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center