Case 002Accretion and dilutionHard

An acquirer at 20x earnings buys a target for 20x earnings, half in stock and half in new debt. Is the deal accretive or dilutive, and what would you change?

EvercoreMenlo Park · 2025EvercoreNew York · 2026Bank of AmericaLondon · 2026

The situation

Tarang Consumer earns Rs 500 crore and has 100 crore shares, so earnings per share are Rs 5.00, and its shares trade at Rs 100, a P/E of 20. It agrees to buy Nilgiri Snacks, which earns Rs 60 crore, for Rs 1,200 crore, also 20x earnings.

Half the price is paid in new Tarang shares issued at Rs 100, and half with new debt at 8% before tax. Tax is 25%. The deal team expects Rs 20 crore a year of pre-tax cost synergies.

Your task

What happens to Tarang's EPS, with and without synergies, and how would a different funding mix change the answer?

Quick check

Before synergies, is the 50/50 deal accretive or dilutive?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

Before synergies the deal is about 1.1% dilutive; with synergies it is about 1.7% accretive. Nilgiri earns 5.0% on its price. New shares cost Tarang 5.0% and new debt costs 6.0% after tax, so the half and half mix costs 5.5%. Rs 15 crore of after-tax synergies closes the gap. All stock would be neutral before synergies; all debt would be the most dilutive.

Step 1What is the shortcut that saves the arithmetic?

Compare what the money costs with what it buys. A deal is accretive when the target's earnings yield is above the weighted cost of the money used to buy it. Nilgiri's earnings yieldEarnings divided by price, the inverse of the P/E. A P/E of 20 is an earnings yield of 5%. is 60 over 1,200, or 5.0%. Paying with shares costs Tarang its own earnings yield, 1 over 20, also 5.0%. Paying with debt costs 8% less the tax shield, 6.0%. A shop that borrows at 6% to buy a stall earning 5% is worse off every year until it cuts costs.

The deal dilutes when the money costs more than the target earnsTarget earns on its price5.0% (60 / 1,200)Cost of new shares5.0% (1 / P/E of 20)Cost of new debt, after tax6.0% (8% x (1 - 25%))50/50 mix, before synergies5.5%, above 5.0%: dilutivethe 5.0% hurdle
Nilgiri earns 5.0% on its Rs 1,200 crore price. Tarang's shares cost 5.0% and its debt costs 6.0% after tax, so a half and half mix costs 5.5%, more than the target earns, and the deal dilutes before synergies.
Step 2How do the full numbers work?

Now prove it. New shares: Rs 600 crore at Rs 100 is 6 crore shares, taking the count to 106. New debt: Rs 600 crore at 8% is Rs 48 crore of interest, Rs 36 crore after tax. Combined earnings are 500 plus 60 minus 36, which is Rs 524 crore, over 106 crore shares: Rs 4.94, down 1.1%. Add Rs 15 crore of after-tax synergies and earnings reach Rs 539 crore, Rs 5.08 a share, up 1.7%.

Rs croreStandaloneBefore synergiesWith synergies
Tarang earnings500500500
Nilgiri earnings6060
After-tax interest on Rs 600 crore(36)(36)
After-tax synergies15
Earnings500524539
Shares, crore100106106
EPS, Rs5.004.945.08
Tarang's EPS falls from Rs 5.00 to Rs 4.94 before synergies, 1.1% dilutive, and rises to Rs 5.08 once Rs 15 crore of after-tax synergies arrive, 1.7% accretive.
Step 3What would you change, and why does the cheapest currency win?

Run the other mixes. At a P/E of 20, Tarang's stock costs 5.0% against 6.0% for debt, so here stock is the cheaper currency and all stock is the least dilutive. The ranking flips for an acquirer on a low P/E: at 10x, its stock costs 10%, and debt becomes cheap. Say that condition out loud; it is the difference between reciting accretion and understanding it.

EPS change against standalone Rs 5.00, by how the deal is paid for0%-3%-2%-1%+1%+2%+3%0.0%+2.7%All new shares-1.1%+1.7%Half shares, half debt-2.4%+0.6%All new debtbefore synergieswith synergies
Against standalone EPS of Rs 5.00, an all stock deal is neutral before synergies and 2.7% accretive after; the half and half deal is 1.1% dilutive before and 1.7% accretive after; an all debt deal is 2.4% dilutive before and only 0.6% accretive after.

Close with the limit. Accretion measures one year of accounting earnings, not value. A deal can lift EPS and still overpay, and a dilutive deal can create value if the growth is real. Interviewers want to hear that you know the difference.

Where candidates lose it

The classic error is saying same P/E, so neutral, and stopping. That is true only for an all stock deal; once any debt is used, the after-tax cost of debt enters and the answer changes.

The second is forgetting the tax shield on interest, using 8% instead of 6%, which makes the deal look far worse than it is.

What the interviewer asks next

  • At what pre-tax synergy figure does the 50/50 deal break even?
  • Tarang's P/E falls to 12x before closing. Which funding mix now dilutes least?
  • Why might a board accept a dilutive deal?
  • How do purchase price allocation and new amortisation change this?

Asked at Evercore, Investment Banking, Menlo Park, 2025 (Wall Street Oasis): techs were very difficult and the accretion/dilution math was really hard to get
Asked at Evercore, Investment Banking, New York, 2026 (Wall Street Oasis): Advanced 3S - Accretion/Dilution
Asked at Bank of America, Retail, London, 2026 (Wall Street Oasis): Walk me through the accretion/dilution impact of a consumer M&A deal

Company names and figures are illustrative.