Earnings per Share (Eps)

Dilution in earnings per share in a merger occurs when the firm's productivity is less than the profitability of the acquirer. The firm targeted may operate in the red. An increase in share counts occurs due to the issuance of additional shares associated with the deal. Also, numerous factors can cause dilution and accretion of earnings per share (Almeida, 2019). This paper will identify possible causes of accretion and dilution of earnings per share (EPS) in a proposed merger.

When the target has an undesirable net income, there is a possibility of expenses being higher than sales. The expense transactions are either debiting or crediting an expense account, hence the negative value. The net income comprises sales without expenses. They include administrative and general expenses, costs of goods sold, taxes, and interests (Almeida, 2019). The net income is negative, meaning there is a loss when expenses are higher than sales. Additionally, if the target's earnings or price is larger than the acquirer's price, the general rule is that an acquisition occurs only when the ratio of price-earnings is more significant than that of the firm being targeted.

When the transaction results in a sizeable number of assets, for example, buildings or facilities, they are amortized in the future, causing dilution or accretion. Debts do not dilute ownership, but net income and interest paid on debts reduce cash flow—a decrease in net income benefits from tax via the lower taxable income. Increased interest expense due to new debt used to finance the transaction is another cause of dilution or accretion. An increase in debts causes a weight on debt-to-equity and debt-to-total ratios, causing accretion (Almeida, 2019). New debts increase equity costs; hence, the equity premium increases to cover the shareholders' additional risks.

Negative and low synergies cause dilution and accretion. Nevertheless, an increase in interest in expenses caused by new debts to finance the transaction increases the rate of dilution and accretion—a reduction in interest income due to a reduction in cash finances the transaction. Synergy is attained through combined technology and talent, cost reduction, and increased revenues (Almeida, 2019). For example, if two companies merge, it creates a significant efficiency resulting in a synergy merge.