EPS accretion or dilution is one of the most common metrics to decide whether a merger is a success or not It's also useful for forecasting, if I'm thinking about buying a company, let's try and forecast the EPS accretion or dilution And that will help me to decide whether I really should go ahead with this merger How does it work? Well you take your target's net income plus your acquirer's net income plus any transaction effects to net income To get to your consolidated net income You then divide that by post deal share outstanding to get to your proforma EPS So let's start off with the target's net income, for that we take the target EPS forecast Times it by the target shares outstanding to get to our forecast target's net income This is all assuming the target standalone I now need to the acquirer's net income So I take the acquirer's shares outstanding to get to the acquirer's net income, great! I've got target net income plus acquirer net income, what transaction effects will we have that affects net income? Well we're going to have synergies post tax Of 506.3 in year one Because of the deal, we'll also have some new debt and some new interest. So I need to subtract off the deal debt interest post tax Put that altogether, target net income, acquirer net income, synergies post tax, deal debt interest post debt get me to proforma net income Great! So I'm halfway to getting to my proforma EPS. I need to divide this by a consolidated number of shares So my consolidated number of shares starts off with my acquirer's shares outstanding, I then need to add on any new shares issued by the acquirer to the selling shareholders And once you've added those two together, you get to our proforma shares outstanding of 2,994.7 Great! So we take the consolidated net income from the previous slide, divide it by the proforma shares outstanding of 2,994.7 And that gets us to a proforma EPS of 6.10 Fantastic! Is that better that the acquirer's EPS if the acquirer had just stayed on its own? And unfortunately now it's not, the acquirer's EPS on its own would have been 6.53 By going through with the merger it goes down to 6.10, nightmare! So this merger wouldn't go ahead on this basis However, it could be the case that we have diluted in year 1 but we may have accretion of EPS happening in year 2 or year 3 In that case we probably would be willing take the dilution in the short term for the long term accretion However again in this case, it's not happening Our dilution is actually getting worse each year, so in case the merger would not go ahead