Accretive Acquisition

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Definition: Accretive Acquisition

Accretive Acquisition

Full Definition of Accretive Acquisition

When a buyer’s value grows as a result of acquiring a certain business, this is referred to as an accretive acquisition. This value accretion occurs as a result of the buyer adding the acquisition’s pro forma EBITDA/earnings to its own, resulting in a higher consolidated pro forma EBITDA/earnings. If the buyer has a greater EV/EBITDA or price/earnings multiple than the acquired company, the total value “pops” as a result of the buyer’s multiple being applied to the combined pro forma EBITDA/earnings, effectively resulting in multiple arbitrage on the purchase.

Typically, an accretion analysis is performed to anticipate the impact of an acquisition on the buyer’s EBITDA/earnings per share. The combined, proforma EBITDA/earnings per share is then compared to the buyer’s current per share results before the impact of the acquisition is taken into account.

Consider the business XYZ, which has a current EPS of $1.00. When XYZ purchases another company, the total proforma EPS is $1.40. The transaction is 40% accretive in this situation. However, the “devil is in the details,” which means that the proforma EPS must still be realised over the next 12 to 24 months.

This entails modifying the earnings of the two companies to account for realised synergies. This can include lower interest expenses as a result of an optimised capital structure, higher margins as a result of the elimination of redundant expenditures (i.e., two sales teams reduced to one), or higher top line revenue as a result of successfully cross-selling products or services.

The ability to integrate both organisations is thus more important than financial modelling in making an accretive acquisition. Acquisitions are frequently designed to be “accretive,” only to fail catastrophically as integration fails and earnings per share fall short of forecasts.

Related Phrases

Earnings Before Interest Taxes Depreciation and Amortization
Stock Purchase Agreement
Asset Purchase Agreement
Leveraged Buyout Analysis
Multiple Accretion
TTM Multiple
Valuation Premium

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Definition Sources

Definitions for Accretive Acquisition are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 24th January, 2022 | 1 Views.