Dilutive Acquisition

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DEFINITION of 'Dilutive Acquisition'

A takeover transaction that will decrease the acquirer's earnings per share (EPS) if additional shares are issued to pay for the acquisition. Dilutive acquisitions decrease shareholder value and should thus be avoided, unless the strategic value of the acquisition is expected to cause a sufficient increase in EPS in later years. An acquisition is only a good deal if the acquirer can derive more value from the acquisition than it pays out.

BREAKING DOWN 'Dilutive Acquisition'

The easiest method of determining whether an acquisition deal is accretive or dilutive is to compare the price to earnings (P/E) ratios of the firms involved. If the target firm's P/E ratio is higher than the acquirer's P/E, then the transaction is dilutive.

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RELATED FAQS
  1. What is considered an accretive acquisition?

    Accretive acquisitions result in a combined entity with higher earnings per share (EPS) than the legacy business of the acquirer. ... Read Full Answer >>
  2. What are some examples of general and administrative expenses?

    In accounting, general and administrative expenses represent the necessary costs to maintain a company's daily operations ... Read Full Answer >>
  3. How do dividend distributions affect additional paid in capital?

    Whether a dividend distribution has any effect on additional paid-in capital depends solely on what type of dividend is issued: ... Read Full Answer >>
  4. Why can additional paid in capital never have a negative balance?

    The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors ... Read Full Answer >>
  5. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

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