A company is considering acquiring a target with a P/E of 20x while the acquirer trades at 15x P/E. The deal is all-stock. Is it accretive or dilutive? Assume no synergies and no change in earnings growth.
A core M&A Advisory interview question — asked in analyst and associate interviews across IB, PE, and the Big 4.
THE SHORT ANSWER
It is dilutive. In a stock-for-stock deal, if the acquirer's P/E is lower than the target's P/E, the acquisition is typically dilutive because the acquirer is issuing shares at a lower earnings multiple to buy higher multiple earnings. Without synergies, the combined P/E will be between the two, leading to lower EPS for the acquirer. The exact calculation requires the exchange ratio, but the rule of thumb is: acquirer P/E < target P/E implies dilution.
WHAT INTERVIEWERS LISTEN FOR
- ✓Acquirer P/E 15x < Target P/E 20x
- ✓All-stock deal
- ✓No synergies
- ✓Dilutive
COMMON MISTAKES
- ✗Saying accretive without calculation
- ✗Ignoring the P/E comparison
Reading isn't the same as answering under pressure.
Interviewers don't hand you the model answer — you deliver yours on a clock. Practice this and 1,000+ questions with AI feedback on every answer.
RELATED QUESTIONS
- Walk me through a DCF.
- What is the difference between Enterprise Value and Equity Value?
- Why might you use EV/Revenue instead of EV/EBITDA?
- How do you calculate WACC?
- A company trades at 8x EV/EBITDA versus a peer at 12x. Why the gap, and what would you check?
- What is a football field chart and how is it used?