How can one determine if a merger is accretive or dilutive?

To determine if a merger is accretive or dilutive, comparing the price-to-earnings (P/E) ratios of the involved firms is the most relevant approach. This analysis involves assessing the P/E ratio of the acquiring company relative to the P/E ratio of the target company.

If the acquiring company has a higher P/E ratio than the target, the merger is expected to be accretive, meaning that it will increase the earnings per share (EPS) of the acquiring company post-merger. This is because the acquirer is paying a lower price for the target’s earnings relative to its own valuation, leading to an overall increase in profitability per share.

Conversely, if the acquirer's P/E ratio is lower than that of the target, the merger is likely to be dilutive, indicating that it may decrease the acquirer's EPS after the merger due to the higher cost of acquiring the target's earnings.

Thus, analyzing the P/E ratios directly relates to the impact of a merger on the company's earnings and provides clear insight into whether the transaction will enhance or detract from shareholder value. Other options, such as looking at total assets, market share, or historical profits, do not directly provide the information needed to ascertain the