What financial impact does an acquisition that is dilutive have on the acquiring company's EPS?

A dilutive acquisition occurs when the acquiring company issues new shares or uses debt financing that results in a lower earnings per share (EPS) relative to its previous performance. This typically happens when the purchase price exceeds the fair value of the acquired company’s assets or if the acquisition does not significantly add to the earnings in the short term.

In a dilutive scenario, the acquiring company's net income does not increase proportionately to the increase in the number of shares outstanding, leading to a decrease in EPS. This is particularly evident if the target company has lower profit margins or if the integration of the acquired business does not yield immediate financial benefits. Thus, the dilutive effect means that existing shareholders will see a reduction in their percentage of earnings attributed to each share they own, ultimately impacting the company's overall financial metrics negatively.

Consequently, understanding the implications of a dilutive acquisition is crucial for evaluating potential M&A transactions and their long-term value to shareholders.