What is an accretive acquisition?

When a company acquires (or 'buys') another company, the deal will, more often than not, impact the acquiring company's market price.

If after the deal, the value of the acquiring company's earnings per share is higher than before the deal, it is known as an accretive acquisition.

Where have you heard about accretive acquisition?

Accretive acquisitions, especially from well-known companies, are never far away from the news. Examples in recent years include 3M buying Capital Safety (with an estimated 4 cent a share accretive); Acena Retail Group's acquisition of ANN INC. (with around a 20% accretion) and Facebook buying Oculus Rift.

What you need to know about accretive acquisition.

To calculate if an acquisition is accretive, 3 figures need to be considered; the original earnings per share, the cost of the acquisition (in share terms) and the earnings per share after acquisition. If the final figure is higher than the original, even after removing the cost of the acquisition in share terms, the deal is accretive.

For example, say a company's earnings per share is 50 cents. The cost of an upcoming acquisition is 25 cents. And after the 2 companies combine, the share value increases by 30 cents.

If you remove the acquisition costs (25 cents) from the original company value (50 cents), they are left at 25 cents. However, the acquisition adds 30 cents a share, meaning after the acquisition, the company has an earnings per share of 55 cents (25 + 30), a 10% increase on their original value.