What is an Accretive Acquisition?
How Does an Accretive Acquisition Work?
Let's assume Company XYZ has EPS of 25 cents this . Next , it acquires Company ABC. The cost of the in per share is 10 cents, but when Company XYZ combines the operations and profits of Company ABC with its own, this adds 12 cents per share. Company XYZ comes out 2 cents per share ahead, meaning the acquisition is accretive to .
Generally, an acquisition is accretive if the 's price/earnings ratio is higher than the target's price/earnings ratio. Theoretically, the target in this case is a relative bargain for the acquirer.
Why Does an Accretive Acquisition Matter?
Accretive acquisitions are very positive for companies because they add to the bottom line and thus increase shareholder value, which is the goal of every company. Of course, not all acquisitions turn out to be accretive, despite all the forecasts saying so. Accordingly, the manner in which an integrates a target into its operations is key to ensuring that the expected materialize.