What Interviewers Are Testing
Accretion dilution questions are designed to reveal whether you can think through deal outcomes quickly. Strong candidates can explain why a deal is accretive or dilutive before opening a model. Weak candidates describe spreadsheet tabs but miss the economic drivers. Interviewers are listening for practical logic: what the buyer pays, how it funds that price, and what earnings lift or drag the combined entity receives.
You should show awareness of both accounting and valuation angles. A deal can look attractive strategically while still being near-term dilutive due to financing costs or amortization. If you can explain this trade-off clearly, you signal maturity beyond formula memory.
How to Structure the Answer
- Start with standalone EPS for buyer and target.
- Build sources and uses from purchase price, fees, and financing mix.
- Calculate pro forma net income after synergies, financing costs, and purchase accounting adjustments.
- Update share count for stock issuance and option dilution effects.
- Compare pro forma EPS vs buyer standalone EPS to determine accretion or dilution.
Present this sequence exactly in this order. It sounds controlled in interview settings and keeps the listener aligned with your logic.
Worked Mini Example
"I would first identify the buyer's standalone EPS and the target's earnings contribution. Then I would lay out sources and uses based on the purchase price, transaction fees, and financing mix across cash, debt, and stock.
Next, I would build pro forma net income by adding target earnings and expected synergies, then subtract financing costs, incremental D&A, and any purchase accounting amortization. After that, I would update diluted share count to reflect any equity issuance.
Finally, I would divide pro forma net income by pro forma diluted shares and compare to buyer standalone EPS. If pro forma EPS is higher, the deal is accretive; if lower, it is dilutive. I would also test sensitivity around synergy realization and funding mix because these are usually the largest swing factors."
How to Calculate Answer Quality
- Driver clarity: Did you identify purchase price, financing, and synergies as core levers?
- Accounting clarity: Did you include financing costs and purchase accounting effects?
- Share-count clarity: Did you explain dilution mechanics from stock consideration?
- Sensitivity clarity: Did you mention which assumptions most change EPS outcomes?
A technically correct answer still scores low if you cannot explain why the result changes when assumptions move.
Common Mistakes and Fixes
Mistake: discussing only income statement lines with no sources and uses context.
Fix: anchor the answer in purchase price and financing first.
Mistake: forgetting purchase accounting amortization effects.
Fix: mention incremental amortization and its after-tax EPS impact.
Mistake: giving a binary accretive/dilutive verdict without sensitivity discussion.
Fix: name two key sensitivities, usually synergy capture and debt cost.
Follow-Up Questions You Should Expect
- How does an all-stock deal compare with an all-cash deal in EPS terms?
- What happens to accretion if synergy timing is delayed by one year?
- How do higher interest rates change your deal outcome?
- Can a deal be dilutive now but still strategically attractive long term?
- Why might management still pursue a slightly dilutive transaction?
Preparing these follow-ups improves your technical credibility and shows you can discuss decisions, not only mechanics.
Frequently Asked Questions
What does accretive mean in M&A interviews?
Accretive means the pro forma EPS after the deal is higher than the buyer's standalone EPS.
What usually drives a deal to be dilutive?
High purchase multiples, expensive financing, low synergies, and large amortization impacts often make deals dilutive.
Should I mention synergies in a quick walkthrough?
Yes. Mention cost and revenue synergies briefly because they are core drivers of pro forma EPS outcomes.
How detailed should financing assumptions be?
At minimum, explain debt cost, cash usage, and share issuance effects because each changes EPS differently.
What is the common candidate error here?
Candidates list steps without explaining how purchase price and financing interact to change earnings per share.