What does the term 'accretion' refer to in the context of mergers and acquisitions?

In the context of mergers and acquisitions, 'accretion' specifically refers to the enhancement of earnings per share (EPS) as a result of a merger or acquisition. When a company acquires another company, if the acquisition generates earnings that exceed the costs associated with it, the consolidated entity's EPS increases. This is often considered a positive outcome for the acquiring company, as it indicates that the transaction is financially beneficial and can enhance shareholder value.

Accretion typically occurs in scenarios where the purchase price of the target company is lower than its earnings contribution post-acquisition. Because of this, shareholders of the acquiring company might experience increased returns, making accretion an important metric for evaluating the impact of acquisition decisions.

In contrast to other concepts related to business combinations, such as asset calculation or liability deduction, accretion focuses on the performance metrics of the combined entity, thereby highlighting the potential favorable financial outcomes of an M&A transaction.