# Accretion Dilution Tester > Run a defensible accretion/dilution analysis with the financing, synergy, and tax mechanics that actually move EPS. Use when pricing an M&A transaction with a public-company acquirer, framing a stock-vs-cash consideration mix, or stress-testing IC and board materials. Built around purchase-price mechanics, financing mix, synergy timing, tax shield, intangible amortization, and disciplined sensitivity. - Skill: `andreworia/accretion-dilution-tester` (Agent Skill) - Install (CLI): `npx skillmds@latest add andreworia/accretion-dilution-tester` - Raw SKILL.md: https://api.skillmd.com/api/skills/andreworia/accretion-dilution-tester/raw - Safety review: pending - Works with: Claude Code, Claude.ai, OpenAI Codex - Category: Coding & Dev Tools - Author: andreworia (https://skillmd.com/u/andreworia) - Updated: 2026-09-17 - Page: https://skillmd.com/skills/andreworia/accretion-dilution-tester --- # Accretion / Dilution Tester ## Purpose Produce an accretion/dilution analysis that holds up under board, sell-side analyst, and rating-agency scrutiny — built from a defensible sources-and-uses, the right financing mix at market rates, realistic synergy timing, and a tax model that reflects actual deal mechanics. The output is not a single accretion number. It is a sensitivity table that shows the path from "what we believe" to "what would have to be true" — and a written paragraph on where the deal lives within that sensitivity. ## Governing Principle **Synergies decide the deal. Financing decides the day-one math. Neither is what's in the IC deck — the IC deck shows the punchline.** A weak accretion analysis lets the headline accretion number do the work and hides the synergies, the financing assumptions, and the share count mechanics that produced it. A strong analysis shows all three transparently and lets the reader see what the deal really requires. ## The Five Mechanics That Move Accretion Every accretion model is the interaction of five mechanics. Get any one of them wrong and the answer is wrong. 1. **Purchase price and structure** — equity value paid, consideration mix (cash / stock / mixed) 2. **Financing mix** — new debt, cash on hand, stock issuance — each with its own after-tax cost 3. **Synergies and dis-synergies** — type, magnitude, timing, phasing 4. **Tax** — cash tax rate, NOL utilization, tax shield from new debt, deductibility of intangibles 5. **Share count and intangible amortization** — new shares issued, intangible step-up, amortization drag ## Workflow ### Step 1 — Lock the transaction structure and sources and uses Before any EPS line is built, fix the transaction architecture: - **Purchase price:** equity value at offer, with the bridge from offer price per share × diluted shares to total equity consideration - **Total enterprise value:** equity + assumed debt − cash − other adjustments (preferred, minority interest) - **Consideration mix:** % cash, % stock, % other (CVR, rollover equity, earnout) - **Stock-component mechanics:** exchange ratio (fixed or floating), collar terms, walk-away rights - **Sources of cash:** acquirer cash on balance sheet, new term loan, new bond issuance, revolver draw - **Uses of cash:** purchase price (cash portion), refinanced target debt, transaction fees, change-of-control payments, financing fees The sources and uses table is the spine of the model. Build it once, label every line, and tie it to financial statements. ### Step 2 — Apply realistic cost-of-financing assumptions The single most common error in accretion analysis is using outdated or wishful financing costs. Use the marginal cost of new issuance, not the weighted-average cost of existing debt. - **New term loan / senior secured:** spread over SOFR / EURIBOR at current credit rating implied by pro forma leverage; check recent comparable issuances - **New senior unsecured / high yield:** secondary trading levels for comparable issuers, with a primary new-issue premium - **Bridge financing:** include the cost if the financing is bridge-then-take-out - **Foregone interest on cash used:** the after-tax interest rate the acquirer was earning on the cash balance (real, not hypothetical — many corporates earn well below money-market rates on operating cash) - **Cost of equity:** for stock-funded deals, the dilution cost shows up via share count; no explicit interest, but the EPS impact must reflect the new share base Apply the after-tax cost: pre-tax interest × (1 − marginal tax rate). The tax shield is real but only to the extent the acquirer has taxable income to absorb it. ### Step 3 — Build the synergy schedule Synergies are the deal economics. Build them with discipline: - **Cost synergies — type:** SG&A overlap (corporate functions, public company costs), procurement, manufacturing footprint, technology, real estate - **Cost synergies — magnitude:** run-rate $ amount and as % of target operating cost; sanity-check against precedent synergy disclosures in this sub-sector (cost synergy as % of target revenue typically clusters 3–8% for in-sector deals) - **Cost synergies — phasing:** the standard phasing is 25% / 50% / 100% by Year 1 / Year 2 / Year 3. Aggressive deals show full-year-one; conservative deals push to Year 3. The IC should see the phasing assumption explicitly. - **Revenue synergies:** include only if you can name the specific mechanism (cross-sell into target customers, geographic extension of acquirer product, channel access). Revenue synergies should be presented separately and excluded from base-case EPS. - **Dis-synergies:** customer overlap loss, talent attrition, integration disruption, capex catch-up. Often understated or omitted. - **Cost to achieve:** integration costs (severance, system migration, real estate consolidation) — typically 1.0–1.5x run-rate synergies, expensed over Years 1–2 A synergy schedule that shows only the run-rate is incomplete. Show year-by-year phasing, cost to achieve, and net synergy contribution to EPS for at least three years. ### Step 4 — Model the tax mechanics Tax is where accretion math gets quietly wrong: - **Acquirer cash tax rate:** the rate actually paid, not statutory; reflect NOL utilization and book-vs-cash differences - **Target cash tax rate:** same — and if it differs materially from acquirer, model the convergence path post-deal - **Tax shield on new debt:** interest expense × marginal tax rate, applied only to the deductible portion (subject to interest deductibility limits — Section 163(j) in the US, similar caps in other jurisdictions) - **Goodwill / intangible amortization:** for stock deals, goodwill is generally not tax-deductible (US); for asset deals or 338(h)(10) elections, goodwill amortizes for tax over 15 years. The deal structure determines this. - **Step-up benefits:** in asset deals, the tax basis step-up creates a depreciation tax shield. Quantify. - **NOL transfer and limitation:** target NOLs may be transferable but subject to Section 382 limits in the US For cross-border deals, the picture is more complex: withholding, repatriation, transfer pricing, controlled-foreign-corporation rules. Engage tax counsel early; do not assume. ### Step 5 — Build the GAAP / IFRS amortization drag For purchase accounting: - **Intangible asset identification:** customer relationships, trade names, technology, non-competes - **Amortization life by intangible type:** customer relationships typically 8–15 years, technology 5–10, trade names indefinite or 10–20 - **Annual amortization charge:** the sum of the above, hitting reported EBIT and net income (but not cash EBITDA) - **Pro forma EBITDA vs. pro forma net income:** the intangible amortization is the wedge — pro forma EBITDA may show accretion while pro forma EPS shows dilution Sophisticated audiences look at both EPS (GAAP) and "cash EPS" (EPS before amortization of acquired intangibles). Present both; flag the gap. Strategic acquirers will often guide to cash EPS post-deal — anticipate this. ### Step 6 — Compute the share count carefully In stock-funded deals, share count mechanics drive the answer: - **Exchange ratio:** fixed or floating; if fixed, what is the value at the announcement price vs. the deal-close price? - **Treasury method on target options/RSUs/converts:** rolled into the deal at the deal price, with the cash-out economics - **Acquirer treasury method:** account for the acquirer's own option pool dilution - **Issuance for financing:** if any equity is being raised alongside the deal, model the dilution - **Buyback / cash discipline:** in cash deals, no new shares issued, but the cash deployed reduces interest income or increases debt — both affect EPS The denominator is as important as the numerator. A model that uses pre-deal share count for accretion math will be wrong by the issuance fraction. ### Step 7 — Run the accretion / dilution math year by year Build the pro forma P&L for at least three years post-close: ``` Pro Forma EPS Year N = (Acquirer Net Income standalone + Target Net Income standalone + After-tax synergies (phased) − After-tax incremental interest from new debt − After-tax foregone interest on cash used − After-tax incremental D&A from PPA step-up − After-tax amortization of acquired intangibles − After-tax integration costs (Years 1–2)) ÷ Pro Forma Share Count ``` Compare to standalone Acquirer EPS. The difference is the accretion / (dilution) per share, expressed both as $/share and as %. A deal is "accretive in Year 1" if Year 1 pro forma EPS > standalone EPS. Conventional standards expect accretion by Year 2 on cash deals; Year 3 on stock-financed strategic deals. Anything beyond that should be defended explicitly. ### Step 8 — Sensitize the inputs that actually move the answer A single-point accretion answer is not analysis. Sensitize: - **Purchase price** ±10% — the bid range the board will consider - **Cost synergy run-rate** ±25% — the realistic range the IC will challenge - **Synergy phasing** (slow / base / fast) — the timing risk - **Interest rate** ±100bps — the financing cost reality - **Cash / stock mix** at three points — to see what the consideration choice costs - **Cash tax rate** — particularly for cross-border Present the two most important sensitivities as a 2D table (e.g., purchase price × synergy run-rate). The honest answer often is: the deal is accretive in the base case but dilutive in 30% of the sensitivity space — show this, don't bury it. ### Step 9 — Translate to credit and capital allocation implications A complete analysis covers the second-order effects: - **Pro forma leverage:** net debt / EBITDA at close, and the deleveraging path - **Interest coverage:** EBITDA / interest expense, with cushion to covenant or rating threshold - **Rating impact:** likely change in credit rating from S&P / Moody's / Fitch (use their stated leverage thresholds) - **Buyback / dividend capacity:** how the deal constrains shareholder return for how long - **Strategic optionality:** what the post-deal balance sheet permits or precludes (next M&A capacity, organic investment, etc.) A deal that is mildly accretive but burns three years of buyback capacity and triggers a rating downgrade may not be a good deal — even if the EPS line is positive. ## Hypotheses to Pressure-Test 1. **"The headline accretion depends entirely on the synergy assumption."** Strip out synergies. Is the deal still accretive on hard mechanics (cost of financing × debt issued vs. target earnings)? If not, the deal is a synergy bet dressed as an EPS-accretive transaction. 2. **"The cost of financing assumed is below market."** Is the modeled interest rate consistent with where a comparable issuer would price today, or with the acquirer's prior issuance from a different rate environment? 3. **"Synergy phasing is aggressive."** Does the model show 75%+ of synergies in Year 1, when integration realities typically deliver 25–40% in Year 1? 4. **"Tax assumptions are optimistic."** Is the model assuming full tax shield on debt that may be limited by Section 163(j)? Is goodwill amortization being treated as tax-deductible in a stock deal? 5. **"The pro forma share count is wrong."** Is the exchange ratio mechanic correct? Are target options being properly rolled at deal price? Is acquirer dilution from concurrent equity issuance reflected? 6. **"The dis-synergies are missing."** Customer overlap loss, talent attrition, integration disruption, capex catch-up — present in every deal, often omitted from the model. ## Quality Checks Before Sharing - [ ] Sources and uses tied to balance sheet, with every line labeled - [ ] Cost of new debt reflects current market for comparable issuer credit and tenor - [ ] After-tax interest used (not pre-tax), with the marginal tax rate documented - [ ] Synergies broken into cost / revenue, with magnitude and phasing both disclosed - [ ] Revenue synergies presented separately and not in the base case unless specifically defended - [ ] Cost to achieve and dis-synergies included - [ ] Intangible amortization modeled with named life assumptions by intangible type - [ ] Both GAAP EPS and cash EPS (ex-amortization) presented - [ ] Share count rebuilt for stock deals using exchange-ratio mechanics; target option treatment explicit - [ ] Year 1 / Year 2 / Year 3 accretion shown, not just steady-state - [ ] Sensitivity on purchase price × synergies, financing cost, and tax presented as 2D tables - [ ] Pro forma leverage and rating-agency implications stated - [ ] Written paragraph explains where in the sensitivity range the deal lives and what would have to be true for it to fail the IC test ## Common Failure Modes - **Headline accretion as the answer.** Showing a single accretion % without the sensitivity around it. Hides the synergy or financing assumption that produces the answer. - **Stale cost of debt.** Using a 2-year-old marginal cost of new debt. The financing market is the most volatile input in the model. - **Synergy fairy tale.** Run-rate synergies that exceed precedent ranges, phased into Year 1, with no cost to achieve. These deals don't show up on the EPS line as forecast — they show up in the integration costs line. - **Revenue synergies in the base case.** Revenue synergies are rarely realized; they should never carry the EPS thesis. - **Tax shield on non-deductible debt.** Modeling full tax shield without testing 163(j) limits or jurisdiction-specific caps. - **Goodwill amortizing for tax in a stock deal.** A US stock deal generally produces non-deductible goodwill. Modeling tax shield on it is wrong. - **Wrong share count.** Pre-deal share count in the denominator for a stock-funded deal. Forgetting to roll target options. Ignoring concurrent equity issuance. - **Hiding pro forma leverage.** Showing accretion without showing the rating-agency consequence. - **No "what would have to be true."** Failing to write the paragraph on where the deal lives in the sensitivity space. Numerically defensible, commercially indefensible. ## Deliverable A pro forma model with sources and uses tied to balance sheet, year-by-year accretion / dilution math (Years 1–3+), GAAP and cash EPS both presented, 2D sensitivity tables on the inputs that actually move the answer (purchase price × synergies, interest cost, tax), pro forma leverage and rating-agency analysis, and a written paragraph stating where in the sensitivity space the deal sits and what would have to be true for the thesis to fail.