Dilution
Investment Banking glossary · M&A & LBO Modeling Dynamics
Definition
Decrease in acquirer pro forma EPS from a transaction: Dilution = (PF EPS - Standalone EPS)/(Standalone EPS) < 0. All-cash deals funded by debt are most likely to be dilutive when the target's earnings yield is below the acquirer's after-tax cost of debt; all-stock deals are dilutive when the acquirer's P/E is below the target's P/E. Intangible amortization from the write-up further drags EPS.
Dilution in plain English
Dilution means a company buys another business and its earnings-per-share (the slice of profit belonging to each share) actually goes DOWN afterward — a bad sign, because owners hoped the deal would make each share more valuable, not less. A useful way to see it: if you pay for the deal with borrowed money but the profits you're buying don't cover the cost of that debt, you've overpaid relative to what it earns, and every share suffers. Similarly, in a deal paid with stock, if the buyer's own shares are valued more cheaply (a lower price-to-earnings ratio) than the target's, it has to hand over a lot of shares to seal the deal, spreading the combined profit thinner. Extra bookkeeping charges from marking up the target's assets can drag earnings down even further.
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