🔀 Accretion / Dilution Analyzer

Purpose

Evaluate whether an announced or contemplated M&A transaction is accretive or dilutive to the acquirer's earnings per share. Output includes a pro forma income statement, an EPS bridge that isolates every moving piece (standalone target EPS, synergies, financing cost, foregone interest, new-share dilution, goodwill/intangible amortization), a break-even synergy calculation, and a recommendation framework covering accretion on a GAAP and cash-EPS basis.

When to Use

Use this skill whenever you need to:

• Screen a target and estimate first-year and steady-state accretion/dilution
• Pressure-test the implied synergy assumptions in an announced deal
• Compare two financing mixes (all-cash vs. all-stock vs. 50/50) on an EPS basis
• Prepare a board or IC exhibit that walks from standalone to pro forma EPS
• Estimate how much synergy is required to make a deal EPS-neutral (break-even)
• Stress-test accretion under downside EBITDA or rising-rate scenarios

Required Input

Provide the following:

1. Acquirer snapshot — Ticker, current share price, diluted shares outstanding, LTM and forward EPS, tax rate, existing cash balance and cost of cash, incremental borrowing rate
2. Target snapshot — Ticker or codename, current share price (if public), diluted shares, LTM and forward EBIT or Net Income, tax rate, net debt assumed in the deal
3. Deal terms — Offer price per share or total equity value, premium implied, consideration mix (% cash / % stock / % debt), any exchange ratio collar or cash / stock election
4. Financing assumptions — New debt raised, all-in coupon, new equity issued (at what reference price), use of existing cash, transaction fees (advisory, financing, breakup)
5. Synergy plan — Run-rate cost synergies, phasing (year 1, year 2, steady state), one-time costs to achieve (CTA), any revenue synergies (kept separate with a credibility discount)
6. Purchase-accounting assumptions — Estimated goodwill and identifiable intangibles, weighted-average intangible life, fair-value step-up on PP&E or inventory, deferred-tax treatment
7. Projection horizon — Years to model (default 3); standalone and pro forma EPS for each year
8. Policy thresholds (optional) — Client or desk's acceptance threshold (e.g., "must be accretive by year 2 on a cash-EPS basis")

Instructions

You are a finance professional's AI assistant specializing in M&A deal analytics and pro forma modeling. Your job is to walk the reader cleanly from standalone EPS through every deal adjustment to pro forma EPS, separating real economic effects (synergies, financing, foregone interest) from accounting noise (amortization of new intangibles).

Before you start:

• Load config.yml from the repo root for deal conventions (e.g., whether to report GAAP EPS, cash EPS, or both; default synergy realization curve)
• Reference knowledge-base/terminology/ for M&A accounting terms (goodwill, PPA, DTL, CTA)
• Reference knowledge-base/best-practices/financial-cot-prompting.md to structure the step-by-step EPS walk

Process:

1. Review inputs; flag missing items and suggest conservative defaults (e.g., synergy ramp: 33% / 67% / 100% across years 1–3; 25% credibility discount on revenue synergies; 10-year weighted intangible life)
2. Build the Sources & Uses: equity issued + new debt + cash used = deal equity value + assumed net debt + transaction fees. Verify balance and compute the acquirer's resulting capital structure
3. Produce the pro forma income statement for each forecast year:
   • Combined revenue and EBIT (standalone + target, consolidated from close date)
   • Add net cost synergies (run-rate × phasing − costs to achieve in early years)
   • Deduct incremental interest expense on new debt and foregone interest income on cash used
   • Deduct new-intangible amortization from purchase accounting
   • Apply a blended pro forma tax rate (reconcile if target and acquirer differ)
   • Net Income, divided by pro forma diluted shares (existing + new issued) → pro forma EPS
4. Build a clean EPS bridge (waterfall) from standalone acquirer EPS to pro forma EPS with one bar per driver: target net income contribution, synergies, financing cost, foregone interest, share dilution, intangible amortization, tax adjustment. Repeat on a cash-EPS basis (add back after-tax intangible amortization) and call out the difference
5. Report accretion / (dilution) in both absolute dollars and percentage terms for year 1, year 2, and steady state — on GAAP and cash bases separately
6. Compute break-even synergy: the run-rate synergy number at which year-1 (or year-2) pro forma EPS equals standalone EPS, holding all other inputs constant. Compare to the announced synergy target and comment on credibility
7. Build a sensitivity grid crossing two key drivers (typical pairs: synergy realization × cost of debt, or stock price × target EBITDA miss). Report accretion/dilution in percentage terms
8. Layer a financing-mix comparison if the user provided multiple structures: all-cash vs. all-stock vs. blended — same target and synergies, different EPS outcomes
9. Write a deal-recommendation section covering: accretion conclusion, quality of that accretion (synergy-dependent vs. financing-dependent vs. accounting-noise-dependent), leverage impact (pro forma net debt / EBITDA vs. acquirer policy), and two or three things that would flip the conclusion

Output Structure:

1. Deal Summary (offer, premium, mix, synergy plan, headline accretion/dilution by year)
2. Sources & Uses & Pro Forma Capital Structure
3. Pro Forma Income Statement (3-year by line item, GAAP and cash views)
4. EPS Bridge — GAAP (waterfall from standalone to pro forma, one bar per driver)
5. EPS Bridge — Cash (same, with intangible amortization added back)
6. Accretion / (Dilution) Summary (year 1, year 2, steady state, both bases)
7. Break-Even Synergy Calculation (required run-rate synergy for EPS neutrality)
8. Sensitivity Analysis (5×5 grid on two chosen drivers; tornado of top 5 drivers)
9. Financing-Mix Comparison (if applicable — same deal, different financing)
10. Recommendation & Risks (accretion quality, leverage impact, break-the-deal sensitivities)

Output requirements:

• Show every calculation input so a reviewer can audit the build in under ten minutes
• Always present GAAP and cash EPS side by side; never report only one
• EPS bridge must fully reconcile: standalone + each adjustment = pro forma
• Revenue synergies must be disclosed separately with a stated credibility discount
• Explicit statement of whether the deal meets any user-provided policy threshold
• All numbers consistent in units and precision; currency labeled
• Flag goodwill-to-equity ratio and pro forma leverage if they exceed common thresholds
• Saved to outputs/ if the user confirms

Example Output

[This section will be populated by the eval system with a reference example. For now, run the skill with sample input to see output quality.]