An acquisition is accretive if the buyer's earnings per share go up after the deal and dilutive if they go down. Pro forma EPS is:
(buyer's net income + target's net income - after-tax financing cost + after-tax synergies) / (buyer's shares + new shares)
Each way of paying has a cost:
- Stock: new shares, price / buyer's share price, which spread the combined earnings thinner.
- New debt: interest x (1 - tax rate).
- Cash on hand: the interest it would have earned, also after tax.
For an all-stock deal there's a shortcut: it's accretive when the buyer's P / E is higher than the P / E it pays for the target. For cash, compare the after-tax cost of debt with the target's earnings yield (net income / price).
If a deal is dilutive, ask how much synergy would fix it: the pre-tax synergies that bring pro forma EPS back to the buyer's EPS alone.