What Does
Accretive Acquisition Mean?
An accretive acquisition occurs when the value of the buyer increases as a result of acquiring a specific company. This value accretion occurs because the buyer gets to add the acquisition’s proforma EBITDA/earnings to its own EBITDA/earnings, therefore yielding a higher consolidated proforma EBITDA/earnings. If the buyer is valued at a higher EV/EBITDA or price/earnings multiple than the acquired company, the total value “pops” due to the application of the buyer’s multiple to the combined proforma EBITDA/earnings, essentially resulting in multiple arbitrage on the acquisition.
Divestopedia Explains Accretive Acquisition
An accretion analysis is usually conducted to forecast the impact of an acquisition on the buyer’s EBITDA/earnings on a per share basis. The combined, proforma EBITDA/earnings per share is then compared to the buyer’s current per share results without the impact of adding the acquisition.
Consider company XYZ with current earnings per share (EPS) of $1.00. XYZ acquires another company resulting in a combined proforma EPS of $1.40. In this case, the acquisition is 40% accretive. However, the “devil is in the integration details,” meaning that the proforma EPS still has to be realized over the next 12 to 24 months.
This means adjusting the two companies’ earnings for realized synergies. This can be a number of things including reduced interest expense from an optimized capital structure, higher margins from the removal of redundant costs (i.e., two sales teams reduced to one), or higher top line revenue from successfully cross-selling products or services.
The key to having an accretive acquisition is, therefore, less the financial modeling and more the ability to integrate both companies. More often than not, acquisitions will be modeled to be “accretive” only to fail miserably as the integration fails and earnings per share fall short of expectations.