Accretion / Dilution Analysis Interview Questions

Model answer

Cash, stock, or a mix. Cash gives sellers certainty and does not dilute the acquirer but uses balance-sheet capacity or debt. Stock shares risk and reward with the seller and preserves cash but dilutes and depends on the acquirer's share value. The mix reflects the acquirer's confidence, how richly its currency is valued, and the seller's tax preferences.

Model answer

The acquirer records acquired assets and liabilities at fair value, writing PP&E and intangibles up or down and recognizing new identifiable intangibles such as customer relationships, technology and trademarks. Goodwill is the residual: purchase price minus the fair value of identifiable net assets. The write-ups create incremental D&A and often a deferred tax liability.

Model answer

Cost synergies come from eliminating duplicate functions, facilities, procurement scale and headcount, and are more certain and faster to realize. Revenue synergies come from cross-selling, expanded distribution and pricing, and are larger in theory but far less certain and slower. Acquirers and the market credit cost synergies much more heavily.

Model answer

Compare the cost of the acquisition financing to the earnings you buy. An all-stock deal is generally accretive when the acquirer's P/E is higher than the target's (paying with expensive stock for cheaper earnings). A cash or debt deal is accretive when the after-tax cost of cash or debt is below the target's earnings yield. Synergies and financing effects then adjust the result.