What Is an Accretive Acquisition?

An accretive acquisition increases the acquiring company's earnings per share (EPS). Accretive acquisitions tend to be favorable for the company's market price because the price paid by the acquiring firm is lower than the boost that the new acquisition is expected to provide to the acquiring company's EPS. As a general rule, an accretive merger or 澳洲幸运5官方开奖结果体彩网:acquisition occurs when the 澳洲幸运5官方开奖结果体彩网:price-earnings (P/E) ratio o෴f the acquiring firm is greater than that of the target f𒉰irm.

How an Accretive Acquisition Works

An 澳洲幸运5官方开奖结果体彩网:accretive acquisition is similar to the practice of 澳洲幸运5官方开奖结果体彩网:bootstrapping, where an acquirer purposely buys a company with a low price-earnings (P/E) ratio through a 澳洲幸运5官方开奖结果体彩网:stock swap trans🐠action to boost the post-acquisition EPS of the newly formed combined business and encourage a rise in the price of its shares.

While bootstrapping is often frowned upon as an accounting practice that games the system and lowers overall earnings quality, an accretive acqui🌞sition plays to the combined synergies of a merger in a positive way.

An accretive acquisition increases the synergy between the acquired and the acquirer. This synergy occurs when the combination of two organizations produces a combined value that is greater than the sum of the separate parts. So, value in an accretive acquisition is generated because the buyer of a smaller company is able to add the acquired business's pro-forma EBITDA/earܫnings ratio to its own EBITDA/earnings ratio, where EBꦇITDA is earnings before interest, taxes, depreciation, and amortization.

If the acquisition is done correctly, the purchasing company has a higher 澳洲幸运5官方开奖结果体彩网:enterprise value (EV)/EBITDA multiple, and the addition of the acဣquired company increases the total val🤡ue of the combined entity.

Example of an Accretive Acquisition

There are many cases where an established company seeks to add value to its shareholders through a strategic acquisition. Unlike an acquisition that is conducted due to research and development or product acquisition purposes, as was the case with Meta's (formerly Facebook) purchase of Oculus Rift, an accretive acquisition immediately increases the value of the acquiring company's stock.

For example, if a large, public technology company wants to increase its EPS immediately, thus increasing its share price, it would look to acquire a smaller technology company with a higher EPS. If the larger company had an EPS of $2 and calculated that if it acquired a smaller company with an EPS of $2.50, it would realize a combined 澳洲幸运5官方开奖结果体彩网:pro-forma EPS of $2.15, the gross value of the acquisition would be 15%. If the cost of acquiring the company is 10 cents per share, the net benefit is positive🌼.

Criticisms of Accretive Acquisitions

However, since pro-forma financial statements and 12- to 24-month forecasts are used to derive the potential accretive value of the acquisition, synergies are not guaranteed. In fact, the only way to realize the added value of combining firms is to integrate both companies effectively and efficiently, so there are no lost benefits. Often, the combination of the firms fails, and the resulting entity realizes an EPS that falls short of expectations causing the firm to l༺ose overall value.