What “accretive” means (quick definition)
– Accretive describes a transaction or investment that increases value over time for the buyer or holder. In corporate M&A, an accretive deal raises the buyer’s earnings per share (EPS). In fixed‑income, accretion is the gradual increase in the recorded value of a discounted bond as it moves toward par at maturity.
Two common contexts
1) Corporate acquisitions — accretion to EPS
– When a buyer acquires a target and the buyer’s pro forma EPS after the deal is higher than its EPS before the deal, the acquisition is called accretive.
– Whether an acquisition is actually accretive depends on purchase price, expected synergies, one‑time transaction costs, tax effects, and especially how the deal is financed (cash, debt, or new shares). Issuing new shares can increase the share count and make a deal dilutive even if the underlying business adds profit.
2) Bonds and fixed‑income — accretion of discount
– A bond bought at a price below par (face value) accumulates value over time; that increase is called accretion. For a zero‑coupon bond purchased at a discount, the purchaser receives par at maturity and the difference represents accrued interest (original issue discount).
– A simple, straight‑line measure of annual accretion is: discount / years to maturity. A more precise measure is the compound annual yield (yield to maturity), which assumes reinvestment and compounding.
Key formulas
– Percent accretion to EPS (corporate): (Pro forma EPS − Pre‑deal EPS) / Pre‑deal EPS
– Straight‑line annual accretion (bond): (Par − Purchase price) / Years to maturity
– Compound annual yield (bond): solve r from PurchasePrice × (1 + r)^n = Par, so r = (Par / PurchasePrice)^(1/n) − 1
Worked numeric examples
1) Zero‑coupon bond, straight‑line accretion
– Face value (par) = $1,000
– Purchase price = $750
– Term = 10 years
– Discount = $1,000 − $750 = $250
– Straight‑line annual accretion = $250 / 10 = $25 per year
– After 10 years the bond pays $1,000; the investor earned $250 total.
2) Same bond, annual compounded yield (yield to maturity)
– Solve for r in 750 × (1 + r)^10 = 1,000
– r = (1,000 / 750)^(1/10) − 1 ≈ (1.3333)^(0.1) − 1 ≈ 0.0292 or 2.92% p.a.
– Note: the straight‑line $25/year is a bookkeeping simplification; the compound yield gives the true annualized return if the bond is held to maturity.
3) Corporate acquisition EPS example
– Buyer EPS before deal = $100
– Target EPS contribution (on a per‑share, pro‑rated basis) = $50
– Pro forma EPS after acquisition = $150
– EPS change = $150 − $100 = $50
– Percent accretion = $50 / $100 = 50%
– Caveat: this simple arithmetic assumes no extra shares were issued, no acquisition costs, no debt interest or amortization effects, and that the $50 contribution is measured on the same per‑share basis as the buyer’s EPS.
Short checklist: how to evaluate whether a deal or investment is truly accretive
– Define the metric: EPS (for corporate deals) or par/value accretion (for bonds).
– Calculate pre‑deal (or pre‑purchase) baseline.
– Build a pro forma model including:
– Purchase price and any premium paid.
– Method of financing (cash, debt, equity) and its effects (interest, new shares).
– Expected synergies and realistic timing for achieving them.
– One‑time transaction and integration costs.
– Amortization, depreciation, and tax effects.
– Adjustments for differing accounting standards or pro‑ration.
– Run sensitivity checks on key assumptions (synergies, interest rates, share issuance).
– Compare pro forma metric to baseline; report absolute and percentage change.
– Consider alternative scenarios (best, base, worst) and the break‑even assumptions for accretion.
Important antonym
– Dilutive: a deal is dilutive if it reduces the buyer’s EPS (or the chosen metric) after the transaction.
Sources for further reading
– Investopedia — Accretive (overview and examples): https://www.investopedia.com/terms/a/accretive.asp
– U.S. Securities and Exchange Commission — Bonds (investor guide): https://www.investor.gov/introduction-investing/investing-basics/glossary/bonds
– FINRA — Zero‑Coupon Bonds (how they work and tax issues): https://www.finra.org/investors/learn-to-invest/types-investments/bonds/zero-coupon-bonds
– Internal Revenue Service — Original Issue Discount (OID) tax treatment: https://www.irs.gov/taxtopics/tc403
Educational disclaimer
This explainer is for educational purposes only and does not constitute personalized investment advice or a recommendation to buy or sell any security. Always consult a qualified financial professional before making investment decisions.