Accretive acquisition definition
/What is an Accretive Acquisition?
An accretive acquisition is one that increases the earnings per share of the acquirer. This is accomplished by offering a lower price for the acquiree than the earnings that the acquiree will contribute to the combined entity. The result is a greater market value for the combined entities than would have been the case if they had remained separate. When this is the case, investors are more likely to bid up the price of the acquirer’s shares. An accretive acquisition is more likely to be the result when the acquirer can identify significant synergies in the acquiree, either by boosting sales through cross-selling or (more commonly) cutting expenses by eliminating redundant costs.
Related AccountingTools Courses
Business Combinations and Consolidations
Problems with Accretive Acquisitions
The problem with this approach is that the expected synergies are not realized for various reasons, such as not following through on an integration plan, resistance by acquiree employees, or excessive optimism in setting synergy targets. Consequently, an acquirer needs a great deal of experience in spotting accretive acquisition opportunities, planning for them carefully, and following through to ensure that all planned synergies are actually accomplished.
Example of an Accretive Acquisition
For example, an acquirer with earnings per share of $3.50 buys a smaller company with earnings per share of $4.00, resulting in combined earnings per share of $3.60. As long as the cost of acquiring the target company is less than $0.50 per share, there is a positive benefit for the acquirer.