Your CEO walks into your office with an idea: buying Tostadora del Sur. "It's small, $60M revenue, $7M earnings, the owner wants $140M and is selling for personal reasons. What do you think?"
There are two versions of your answer. In the first, you say "let me look at it" and come back in a week with generic analysis. In the second, you open your A/D model, plug in three parameters, and answer in 5 minutes: "accretive if we finance 70% in debt AND we get $4M of real synergies — without synergies, dilutive by 6%. How confident are we in the synergies?"
The difference between the two answers isn't analytical genius. It's having mastered ONE simple model — the accretion/dilution — that takes 30 minutes to learn and defines you as a CEO ally for your entire career.
By the end of this module you'll have it down. Let's go.
Andina (P/E 16.7x) buys Tostadora del Sur (asking P/E 20x) 100% in stock, no synergies. Is the deal accretive or dilutive? Why?
In plain language
Before the mechanics, the four basic questions.
Why do this at all?
Because A/D is the first test of any deal — the "pass or no pass" before investing in expensive due diligence. If the deal is massively dilutive and required synergies are unbelievable, it's not worth spending 6 months on bankers and lawyers. A/D is the filter that protects your time and the board's.
Who uses it?
Corporate development or the CFO builds it. The board approves on every deal. Bankers present it in their pitch decks (with optimistic numbers — your job is to take them apart). Financial press reads it when a deal is announced — every analyst's first question is "is it accretive in year 1?"
When does it show up?
On every deal evaluated, before signing the LOI. In the investment committee that approves the offer. In the board roadshow defending the price. In the analyst conference on announcement day. In quarterly reports post-close, comparing realized A/D against promised.
What if we skip it?
You buy at multiples that destroy value without seeing it. You defend deals with vague strategic narratives because you don't have the number that shows how much it actually costs existing shareholders. When the board asks "does this create or destroy value per share?" — the most basic M&A question — you have no answer. The CFO career ends there.
Andina looks at Tostadora del Sur
Andina S.A. — the company you know from the other modules — is in its best year ever. $200M revenue, $30M net income, 20M shares at $25 ($500M market cap, P/E 16.7x). Excess cash and the CEO wants to grow.
Tostadora del Sur is a smaller competitor you've known for years. $60M revenue, $7M net income, 5M shares. The owner is a family founder who wants to exit and asks $140M ($28/share, implying P/E 20x — a 27% premium over what he himself trades at in the market).
This is the classic mid-market M&A conversation in LATAM. Three critical questions: is the deal accretive (your EPS goes up) or dilutive (it goes down)? How much new debt do you take and how much stock do you issue? How many synergies MUST you execute for the deal to work?
The visual below lets you play with the three levers live. Move the sliders. Watch pro forma EPS change. Find the point where the deal is just accretive — and ask yourself whether the required synergies are credible.
Three sliders, one decision
Three sliders, one decision: does this deal pass the filter or not?
Start moving "% cash" — you'll see how the financing mix changes the result dramatically. Then move "premium" — the cost of enthusiasm. Last, move "synergies" — the lever the board will ask you to defend.
Interactive visual
Andina buys Tostadora del Sur — accretive or dilutive?
Three levers: how you finance the deal, what premium you pay, what synergies you execute. Move the sliders and watch pro forma EPS change.
A/D vs standalone
+6.9%
Financing mix
60% % cash · 40% stock
Premium over current price
27% premium · target a $27.94/sh
Annual expected synergies
$4.0M run-rate synergies
Minimum synergies for break-even
$0.8Mper year
At this premium and mix, this is the minimum synergies you need not to destroy EPS.
| Standalone (Andina alone) | Pro forma (with deal) | |
|---|---|---|
| Net income | $30.0M | $35.7M |
| Shares | 20.0M | 22.3M |
| EPS | $1.50 | $1.60 |
What you are seeing
Move "% cash" up: the deal becomes more accretive (you finance with cheap debt vs issuing pricier shares), but you raise leverage. Move "premium" up: the deal becomes more dilutive (you pay more for the same earnings). Move "synergies" up: accretion improves, but the board will ask WHERE they come from. The expert rule: a deal accretive only with dubious synergies is not an accretive deal — it is a bet.
You're paying a 27% premium over current price. To break even you need $0.8M of annual synergies. If you trust that number, the deal passes. If you doubt it, the deal doesn't pass.
The mental rule that comes out of playing with this: if the deal is only accretive with synergies you yourself would doubt executing, it's not an accretive deal — it's a bet counted as accretive deal. The distinction is not semantic; it's the difference between creating and destroying value for existing shareholders.
And a trick: the visual's "break-even synergies" point is the conversation you have to have with your board. If you need $5M annual synergies not to destroy EPS and your integration team can only credibly commit to $3M, the deal IS NOT viable at current price. You have two options: lower the price or kill the deal. The third option, "hope synergies materialize," is the road to the write-off.
The mechanics: how to build A/D well
- Start with standalone EPS, not absolute net income. The board measures in EPS because that's what the shareholder measures. If your model gives net income but dilutes EPS, it's still dilutive from the existing shareholder's perspective.
- Model three financing mixes, not one. 100% cash, 100% stock, mixed. Each has a different profile. Cash uses balance sheet (leverage). Stock dilutes the existing shareholder but preserves flexibility. Mixed is typically optimal but harder to defend.
- Distinguish cost synergies from revenue synergies. Cost ones are credible (office closures, duplicate elimination); revenue ones are notoriously fantasy. If the case depends on revenue synergies, demand a concrete operating plan and trackable metrics.
- Calculate synergies post-tax, not pre-tax. A classic error: adding gross synergies to the model. Correct: synergies × (1 − tax rate). Changes the result significantly.
- Add integration cost as a hit. $5M annual synergies that cost $20M one-time to integrate are not the same as $5M without cost. Year 1 is typically dilutive even if run-rate is accretive.
- Sensitize by scenario. Not just "best case." Base, stress (synergies 30% less, integration 50% more expensive). If the deal only works in best case, it DOESN'T work — every deal operates under Murphy.
- If you buy a company with a P/E LOWER than yours, financing 100% in stock: the deal is always accretive without synergies. You're "selling expensive" your shares to "buy cheap" the target's. This is the heart of serial acquirers (Berkshire, Constellation Software, Danaher).
- If you buy with a P/E HIGHER than yours: you need synergies for it to be accretive. This is typical when a traditional company buys a higher-growth one — you pay a higher multiple and have to justify it with real incremental value.
- If you finance in cash (via cheap debt) instead of stock: the deal becomes more accretive. Reason: you're replacing expensive equity (cost of equity 12-15%) with cheap debt (cost of debt after-tax 4-6%). But you raise leverage — the board will ask about covenants.
- Synergy break-even depends on only three things: premium paid, financing mix, P/E gap. Memorize that mental map and you can compute approximate A/D in your head for any mid-market deal.
Adversarial check
Adversarial check
1.The CEO presents a deal: "we buy this company for $100M, the banker says it's 12% accretive in year 2 with $8M annual synergies." What do you ask?
2.Your model says: "The deal requires $6M annual synergies to break even. Your integration team only commits to $4M credibly." What do you do?
3.Why does most M&A destroy value at 5 years, per multiple academic studies (KPMG, McKinsey, Bain)?
Exit checklist
Suggested re-review: every time a real deal appears in your pipeline. The second module of the pillar (5.2 Valuation) extends this model with DCF, comparables, and precedents.
Optional
Go deeper
Sources and books to dig into the original material