How can a publicly-traded company reduce EPS dilution in a Mergers and Acquisitions deal?

Using cash for an acquisition is the most effective way for a publicly-traded company to reduce EPS (Earnings Per Share) dilution in a Mergers and Acquisitions deal. When an acquisition is funded entirely with cash, the acquiring company does not issue additional shares to finance the purchase, which means the existing shareholders do not experience dilution in their ownership stake.

When shares are issued as part of the acquisition, existing shareholders’ ownership percentage decreases, which can lead to a dilution of EPS, as there are now more shares outstanding divided against the same net earnings. Conversely, using cash preserves the current number of shares and can help maintain or potentially enhance the EPS, provided that the acquisition leads to increased earnings.

Providing context, increasing sales and decreasing expenses can improve overall financial performance and therefore possibly improve EPS over the long term, but they are not immediate measures to prevent dilution in the context of financing a deal. Meanwhile, using debt financing also carries risks such as interest payments and potential impacts on cash flow, but it can still result in dilution if equity is issued for the acquisition. However, these options do not directly address the issue of preventing dilution in ownership stakes in the same way that using cash does.