In an all-stock deal, what is a quick rule of thumb to assess accretion?

• A. The buyer's P/E ratio is higher than the seller's
• B. The buyer's P/E ratio is lower than the seller's
• C. P/E ratios are irrelevant
• D. You can only use revenue multiples

Answer: (A)

In an all-stock deal, accretion or dilution hinges on how the two companies are valued relative to their earnings. When funding the purchase with the acquirer’s stock, the number of new shares issued depends on the stock price (and thus the P/E) of the acquirer. If the acquirer’s stock has a higher P/E than the target’s, its stock is valued more richly relative to earnings, so you need fewer shares to finance the deal. Issuing fewer shares for the same amount of target earnings tends to lift post‑merger earnings per share, making the deal accretive. If the acquirer’s P/E were lower, you’d issue more shares for the same earnings, increasing dilution and reducing post‑merger EPS. P/E is a handy quick proxy here because it directly affects how many shares you issue in an all-stock transaction. Revenue multiples don’t capture the earnings impact and thus aren’t as directly informative for accretion.