Definition: The increase that a buyout of another company will have on the acquiring company’s earnings per share.
Example: ACQ Company has 1,000,000 shares outstanding. It is expecting to make $200,000 in net income (aka new profit, earnings) this year. That means the earnings per share will be $200,000/$1,000,000, or $.20. Let’s say that it has a chance to acquire TRG Company by exchanging with current TRG shareholders 100,000 new shares in its company for all of the outstanding shares of TRG. Let’s also say that TRG is expected to earn $40,000 in profit this year. After the buyout, ACQ will have 1,100,000 shares outstanding, but it will also own TRG and all the profits TRG will make. The total profit for the combined company will be $240,000. Dividing $240,000 by 1,100,000 shares results in earnings per share of about $.22. Just buying out TRG boosted earnings per share. Therefore, the buyout is accretive to earnings.
Investeach explains: Companies usually pay a premium for the companies they acquire to motivate owners of the target company to give up their shares. This results in a buyout that is initially dilutive to earnings, meaning that the earnings per share will drop after the acquisition.
A company’s stock price is largely determined by the amount the company is able to earn per each share of stock outstanding. In the rare instance that an acquiring company announces that a planned acquisition will be accretive, the stock price may actually go up after it makes the announcement.
Riddle me this:
1. To determine whether an acquisition will be accretive, what do we examine before and after the buyout?
2. Why are acquisitions normally dilutive to earnings?
3. What will probably happen when a company makes an announcement that a planned acquisition will be accretive to earnings?
Opposite of: Dilutive.