Earnings dilutive

Acquisitions are said to be earnings accretive or earnings enhancing if they increase EPS and earnings dilutive if they decrease EPS.

Dilutive acquisitions clearly need justifying. There are a number of reasons why a company may be right to make a dilutive acquisition:

  • An acquisition may boost growth through sales or cost synergies; it may be accretive in the long term
  • The acquired business may deserve a higher PE if it is lower risk than the acquirer. It would therefore be dilutive, but nonetheless worth buying.
  • The acquisition may have strategic advantages (such as new technology or brands) that will boost growth in the long term.
  • The combined business may be more stable or allow better coordination: for example, by increasing vertical integration.
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