Relative P/Es are useful sense checks They work for cases with no synergies and 100% debt or 100% equity financing There are three main Ps that we can look at The first one is your acquirer P/E and this is the acquirer share price prior to any merger Over the acquirer's EPS, again prior to any merger The second one is your acquisition or your target's P/E It's the offer price being given to the shareholders over the target's EPS The third is your debt P/E which is one over the post tax cost of debt There's a relationship between these P/Es and what the relationship says is "If the acquisition or target P/E is greater than the acquirer P/E, the deal is dilutive" If you're using 100% stock or equity financing Alternatively let's compare another two of the P/Es If the acquisition or target P/E is greater than the debt P/E, the deal will be dilutive if using 100% debt financing Let's use some numbers to try and illustrate that a bit better Here we've got some assumptions, we've got an acquirer P/E of 15, post tax cost of debt 4% and an acquisition P/E of 18 So we can them underneath in the table, in the second column What we've done in the third column is we have inverted them. So let's look at the acquisition P/E first, it's 18 That says that I can acquire a share for maybe 18 dollars and I would get one dollar in return earnings per share every year Okay, well if we looked at the next column, when we invert the P/E that gives me an earnings yield Again for every 18 dollar share I buy, I get one dollar back. That's a 5.6% return or earnings yield Okay that's interesting, let's compare that to the acquirer P/E. The acquirer P/E is 15, if I invert that, that gives me a 6.7% return What we're saying in an acquisition is the acquirer shareholders instead of receiving their 6.7% The directors say no we won't give you that, instead we'll reinvest it in this acquisition and we'll turn this 6.7% into a 5.6% return That sounds awful, we're taking a higher return and diluting it down to a lower return Therefore if the transaction is 100% equity financed, the deal will be diluted However, now let's compare the acquisition target P/E to the debt P/E The debt P/E here is 25 but again invert that again, that gets us back for post tax of debt 4% Directors of the acquirer company could say, let's borrow money which cost us 4% and invest it in the acquisition target at 5.6% That sounds great! Borrow at 4%, get return of 5.6%? This tells me that if the transaction is 100% debt financed, the deal will be accreted So turning those P/Es into earing yields or cost of debt does help to illustrate the point being made here by your P/Es Remember though, it's just a rule of thumb if you're using 100% equity or 100% debt If you're going to be using a mix, then we need to use some merger modelling to calculate if it's EPS accreted of diluted