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PHILADELPHIA ( MainStreet) -- Accretion can be as simple as two plus two.
Company A, with earnings per share (EPS) of 43 cents merges with, combines with or acquires Company B. Company B has an EPS of 22 cents. If the deal results in an EPS total of 65 cents per share (43 + 22), then it is declared to be accretive. Actually, if the combined EPS is anything more than the acquirer's original 43 cents then it is considered accretive, as in resulting in growth. The arithmetic fact is shouted from the rooftops. Company executives brag to the Board of Directors, to the shareholders, to reporters and to analysts. And the general response is oh-so-positive.
Accretive acquisitions are the desirable option for shareholders, as opposed to dilutive acquisitions.
Fundamentally, an accretive acquisition is any acquisition that will increase the EPS calculation for the company that makes the purchase. The opposite of an accretive acquisition is referred to as a dilutive acquisition. Just as no one wants a diluted martini, no one wants to promote and brag about something that decreases the relatively easy-to-discuss measure called earnings per share.
The word "accretive" is not so commonly used and thus it sounds like it just might be financial industry lingo for a really great outcome. But is it really all that simple? Of course not.
Growth is important and it is the goal of every company executive to provide growth to the shareholders. Several companies, such as
Watson Pharmaceuticals(WPI) or
Canada's Whiterock REIT(WRK-UN.TO), are upfront about their desire for accretive acquisitions. But EPS growth is not necessarily true value creation... Enron proved that.
Carol Heiberger is the author of ExecuSpeak Dictionary. Her industry experience includes positions with Ford, Bell Atlantic (now Verizon) and a large energy utility. Her clients have included government entities, not-for-profits and businesses of every size. She has served as the COO of a start-up CATV/ISP company, director of operations and as an adjunct assistant professor for an MBA program. Her volunteer work includes service as a SCORE business counselor and on the loan committee for a microlender. Her education includes an MBA from Wharton. ExecuSpeak Dictionary is the result of her experience in industry and consulting and teaching. She can be contacted at Carol@execuspeakdictionary.com.