
Accretive
In both finance and in general lexicon, the term "accretive" is the adjective form of the word "accretion", which refers to gradual or incremental growth. \--In corporate finance, accretive acquisitions of assets must add more value to a company, than the costs of acquiring the target entity, \--Accretive deals can occur if acquired assets are purchased at a discount to their perceived current market value. \--In general finance, accretive investments refer to any security that is purchased at a discount. If a person purchases a bond with a value of $1,000, for the discounted price of $750, with the understanding that it will be held for 10 years, the deal is considered accretive, because the bond pays out the initial investment, plus interest. This can be due to the fact that the newly-acquired assets in question are purchased at a discount to their perceived current market value, or if the assets are expected to grow, as a direct result of the transaction. By definition, in corporate finance, accretive acquisitions of assets or businesses must ultimately add more value to a company, than the expenditures associated with the acquisition.
What is Accretive?
In both finance and in general lexicon, the term "accretive" is the adjective form of the word "accretion", which refers to gradual or incremental growth. For example, an acquisition deal may be deemed accretive for the absorbing company, if that deal contributes to an increase in earnings per share.
By definition, in corporate finance, accretive acquisitions of assets or businesses must ultimately add more value to a company, than the expenditures associated with the acquisition. This can be due to the fact that the newly-acquired assets in question are purchased at a discount to their perceived current market value, or if the assets are expected to grow, as a direct result of the transaction.
Key Takeaways
--The term "accretive" is an adjective that refers to business deals that result in gradual or incremental growth in value for a company.
--In corporate finance, accretive acquisitions of assets must add more value to a company, than the costs of acquiring the target entity,
--Accretive deals can occur if acquired assets are purchased at a discount to their perceived current market value.
--In general finance, accretive investments refer to any security that is purchased at a discount.
Breaking Down Accretive
In general finance, accretion refers to the change in the price of a bond or security. In fixed-income investments, the word accretive may be used to describe the increase in value attributable to interest accrued but not paid. For example, discounted bonds earn interest through accretion, until they reach maturity. In such cases, acquired bonds are acquired at a discount when compared to the current face value of the bond, also known as the par. As the bond matures, the value increases, based on the interest rate that was in effect at the time of issuance.
Determining the Rate of Accretion
The rate of accretion is determined by dividing the discount by the number of years in the term. In the case of zero coupon bonds, the interest acquired is not compounded. While the value of the bond increases based on the agreed-upon interest rate, it must be held for the agreed-upon term, before it can be cashed out.
Examples of Accretion
If a person purchases a bond with a value of $1,000, for the discounted price of $750, with the understanding that it will be held for 10 years, the deal is considered accretive, because the bond pays out the initial investment, plus interest. Depending on the type of bond purchased, interest may be paid out at regular intervals (annually, semi-annually, etc.), or it may be paid in lump sum, upon maturity.
With zero coupon bonds, there is no interest accrual. Instead, it is purchased at a discount, such as the initial $750 investment for a bond with a face value of $1,000. The bond pays the original face value, also known as the accreted value, of $1,000, in a lump sum upon maturity.
In corporate finance acquisition deals are often accretive. First, let's assume that the earnings per share of Corporation X is listed as $100, and earnings per share of Corporation Y is listed as $50. When Corporation X acquires Corporation Y, Corporations X’s earnings per share increase to $150--rendering this a 50% accretive deal.
[Important: The antonym to "accretive" is "dilutive", which describes any deal which causes a corporation's earnings per share value to drop.]
Related terms:
Accreted Value
Accreted value is a bond’s current value on a balance sheet including the interest accrued even though that is not paid until the bond matures. read more
Accretion
Accretion is business growth from internal expansion or through mergers and acquisitions. read more
Accretive Acquisition
An accretive acquisition is one that will increase the acquiring company's earnings per share (EPS). read more
At a Discount
"At a discount" is a phrase used to describe the practice of selling stocks, or other securities, below their current market value read more
Bond Valuation
Bond valuation is a technique for determining the theoretical fair value of a particular bond. read more
Current Market Value (CMV)
The current market value is the present value of a financial instrument, which can be the closing price or the bid price depending on the item. read more
Compounding
Compounding is the process in which an asset's earnings, from either capital gains or interest, are reinvested to generate additional earnings. read more
Coupon
A coupon is the annual interest rate paid on a bond, expressed as a percentage of the face value, also referred to as the "coupon rate." read more
Current Face
Current face is the total outstanding balance of a mortgage-backed security (MBS). read more