Walk me through accretion / dilution mechanics.

Accretion / dilution analysis tells you whether an M&A transaction increases or decreases the acquirer's pro forma EPS in the year after close. The mechanics are about comparing what the acquirer's EPS would be without the deal versus pro forma.

Step one: gather standalone financials. Acquirer net income, acquirer share count, target net income, deal financing mix.

Step two: build pro forma net income. Start with acquirer net income, add target net income, then layer adjustments. Subtract the after-tax cost of new debt — interest expense times one minus the tax rate. Subtract foregone interest income on cash used — same after-tax adjustment. Add expected cost synergies, after-tax, often phased in. Subtract incremental D&A from any asset write-up at close, after-tax. Subtract amortization of intangibles created in the deal.

Step three: calculate pro forma share count. Acquirer baseline shares, plus any new shares issued to fund the deal — purchase price times equity portion divided by the acquirer's share price.

Step four: divide pro forma net income by pro forma share count. Compare that to standalone EPS.

The quick rule of thumb: in an all-cash deal, the deal is accretive if the target's after-tax earnings yield exceeds the after-tax cost of debt. In an all-stock deal, the deal is accretive if the target's P/E is lower than the acquirer's P/E. Mixed deals fall in between.

In practice, the swing factors are how much synergy you assume, how quickly synergies phase in, the financing mix, and any purchase accounting adjustments — particularly amortization of intangibles, which is non-cash but hits GAAP EPS. That's why bankers also show "cash EPS" stripping out deal amortization, especially in deals with large intangible step-ups.

For the MD's comfort, I'd always show year-1 and year-3 accretion, run it under low/base/high synergy cases, and break out the cash and stock components separately.