Dilutive Acquisition

What is a 'Dilutive Acquisition'

A dilutive acquisition is 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 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. How do I evaluate whether a company is a good acquisition candidate?

    Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation and financial statements. Read Answer >>
  3. 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 >>
  4. 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 >>
  5. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
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    Learn about accretion and dilution in mergers and acquisitions. What makes a deal accretive, and how is earnings per share ... Read Answer >>
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