Accretion, Dilution and the Obligatory Options

Also, another round of Where on the Web?
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First up this week is

Manny Lopez

, who writes: "What does it mean to say that earnings are accretive? I usually hear it in relation to a merger or acquisition. It must obviously have something to do with the accounting treatment of the earnings of the combined entity, but I don't know what that means or whether it is better or worse than it's alternative, whatever that may be."

This one's pretty straightforward, Manny. Here's the lexicology of the matter:

Accretive

is the adjectival form of the noun

accretion

, which

The American Heritage Dictionary

defines as "growth or increase in size by gradual external addition, fusion, or inclusion." And bigger is better everywhere this side of Lilliput, particularly when money's concerned.

Your hunch that accretion is related to M&A accounting is correct. Companies love to use the term in press releases announcing recent deals. Though these missives are always chock full of breathless excitement and references to tantalizing synergies, the concept of accretion gives companies another, more objective, way to express the bottom-line impact of an acquisition: Will it, or will it not, increase earnings per share? If it does, the deal's accretive to earnings. If it doesn't, it's dilutive. And dilution, as anyone who's had a mixed drink at

Houlihan's

can tell you, is bad.

Accretion is relative, and there are different ways to calculate it. You'll also read about accretion in terms of cash flow per share, a measure that's sometimes considered more important than earnings per share, as in the case of companies that operate in rapidly consolidating industries and need the ready resources for expansion.

A big caveat: For companies with stratospheric P/E ratios, finding acquisitions that are accretive to earnings isn't too herculean a task.

Message Center

Memo to

Erik Vegoe

, who wonders what effect warrants have on a stock's price: In a rational market, they should drive it down. Since warrants are one simple act -- the act of exercising -- away from becoming regular common stock, they should always be considered dilutive. Specifically, they should be included in the number of shares outstanding when measuring earnings per share.

Memo to

William Bianco

, who wonders what the difference is between buying puts and writing calls -- don't they both give you the option to sell a security at a given price? No. It's true that buying puts and writing calls both give you similarly short positions in a stock. But options are optional only when you buy them. When someone exercises a call you've written, you've got to deliver the stock.

Memo to

Razvan Cristescu

, who wonders where on the Web he can type in a symbol and get all the analyst ratings for a stock: I don't know of any site that provides that sort of research for free. You can get complete analyst coverage from sites like

Zacks Investment Research and

Briefing.com, but it'll cost you -- 600 bones a year in Zacks' case. For consensus broker recommendations, check out

TSC's

revised

Tools of the Trade section. Click on "Research," then on "broker recs" on the top menu. All you need to do then is enter the stock's ticker symbol, and you'll get mean consensus recommendations, including the number of brokers in the consensus, for a variety of historical time frames.

Memo: Have a dumb question relating to finance? Great. Have a problem with something I've written? Let me know at

MonEmailbag@thestreet.com, and I'll do my best to answer every Saturday. Include your full name, and please, no questions seeking personal financial advice or regarding personal brokerage disputes. And this reminder: Because of the volume of mail, personal replies can't be guaranteed.