In an all-stock deal, when is a deal considered accretive?

In an all-stock deal, a transaction is considered accretive when the acquiring company has a higher price-to-earnings (P/E) ratio than the target company, resulting in an increase in the acquiring company's earnings per share (EPS) post-transaction. This is because a higher P/E indicates that investors are willing to pay more for each dollar of earnings, suggesting a stronger valuation for the acquiring company.

When the acquiring company with the higher P/E ratio buys a target company with a lower P/E ratio, the effect on EPS is positive due to the earnings contribution from the target being less costly, relatively speaking, than the dilution of shares being issued. Consequently, the merger can enhance the overall earnings power of the combined entity, thereby increasing the acquirer's valuation metrics.

In contrast, other scenarios where either both companies have a higher P/E or a lower P/E could lead to different outcomes that are not necessarily accretive, as they may not provide an advantageous earnings mix.