Basic M&A terminologies can be highly confusing. If you are new in the industry or aspiring to start your career, you might hear a few terms that will make you scratch your head. Granted, you can whip out your phone and Google the terms, but we have taken the liberty of compiling all the commonly used M&A terminologies in one place.
These are the people that are usually involved in a transaction. Some of these are roles, and some are titles, but you will undoubtedly hear them during M&A discussions.
The acquirer is the person or company acquiring the business for sale. They are also referred to as the buyer in a transaction.
- Target company
The target company, or the target, is the company that the buyer is looking to acquire. They may or may not be for sale at the time of targeting, and if they are for sale, they are also referred to as the seller.
- Head of Corporate Development
Commonly referred to as the Head of Corporate Development, is the person in charge of executing mergers, acquisitions, divestitures, and capital raising in-house for a corporation.
- Investment Bankers
An investment banker (a.k.a banker) is an individual who works for a financial institution, typically banks, whose primary concern is to raise capital for corporations. In short, they help buy or sell companies.
If an owner decides to sell their company, that person can hire a banker, and the banker will take care of the rest. A buyer can also approach an investment banker to look for a particular target company. The banker usually takes a percentage of the transaction as their professional fee if the deal goes through.
- Deal Lead
This person is the one leading and driving the process of an acquisition. In a buy-side deal, this is also the head of corporate development.
- Integration Lead
An integration lead is the individual leading the integration efforts of a transaction. This can be a dedicated role inside of a very acquisitive company. However, if the company doesn't have a dedicated role, this person would ideally come from the business unit inheriting the acquired company post-close. Sometimes, this person is also the business sponsor.
- Deal Sponsor
The deal sponsor (a.k.a business sponsor) or the deal champion is the person who has committed himself or herself to driving the deal forward. They will face the company's executives and explain why the acquisition is a good investment for their money.
This person will also be held accountable for the progress of the entire transaction. Their primary goal is to ensure that corporate development has all the help they need to complete the transaction and oversee the integration process.
- Executive Sponsor
An executive sponsor is a c-suite person that has approved the proposed M&A transaction. Every deal needs to have an executive sponsor before it can move forward.
C-level or c-suite is a term used to describe high-ranking executives in an organization. The letter C stands for "chief", just like a chief executive officer and chief operating officer. Officers who hold c-level positions are typically considered the most powerful and influential members of an organization.
These are people who own shares of a company. It is important to note that not all investors are shareholders. Some investors invest in a company without gaining shares.
Stakeholders are people who have an interest in the performance of a company, and this includes shareholders and employees.
- Board of Directors
Often referred to as "The Board", this is a group of people who are not working inside the company, but are responsible for protecting and enhancing shareholder value. Their principal role is strategy, oversight, and governance, and this means they get to review/feedback and approve/reject the buy plan.
- Steering Committee
The steering committee is a group of people created to provide mentorship and governance during integration. The integration lead is responsible for building the steering committee to answer and address some of the most difficult questions and problems when integrating both companies.
The steering committee usually consisted of the deal sponsor, leadership from the acquired company, functional experts, and industry experts.
These are some of the most common documents in an M&A process. If you want to know more about the entire deal lifecycle, read here:
- Investment Thesis
This is a formally written document containing the reasoning behind the desired investment, backed up by research and analysis. If this is approved, then it's time for corporate development to think about the best way to go about the investment. Sometimes, the best way is to build a capability or business from scratch. But often, they result in an acquisition.
- Deal Thesis
The deal thesis is a document that contains the reasoning behind the desired deal, whether it's an acquisition, joint venture, or any other transaction. If they think about buying a company, this document will show why it's the best route to achieve the investment thesis.
- Non-Disclosure Agreement
Non-Disclosure Agreements (a.k.a NDA) is a legally binding contract forcing the parties to keep sensitive information confidential. This document is very common to parties about to enter due diligence where sharing sensitive information is absolutely necessary.
- Confidential Information Memorandum
A confidential information memorandum acts as a teaser that bankers use to entice potential buyers. It's a short but accurate summary of the entire company for sale. If there are multiple buyers, there will be an auction.
- Indication of Interest
Commonly referred to as IOI, this is an informal document that expresses the buyer's interest in buying the company for sale. This is commonly used by companies who are participating in an auction process. After seeing the CIM, they issue an IOI to get more details about the target company and make a proper offer for the company.
- Letter of Intent
The letter of intent, or LOI, is a formal document representing the buyer's final offer. This document typically includes the price range of their final offer, the due diligence duration, time to close, confidentiality, and possibly exclusivity period.
- Definitive Purchase Agreement
A definitive purchase agreement is a legal document that contains every term and condition agreed upon by both parties. This document supersedes all prior agreements and is used to transfer the ownership of a company.
- Go-To-Market Strategy
Often referred to as GTM, it is a comprehensive plan that outlines how to acquire new customers, enter new markets, achieve projected sales, or increase revenue. It is very popular in M&A since the buyer is acquiring a new company and has to plan for new incoming products.
If you are not familiar with legal terms, below is a list of the most common legal terminologies you will encounter in an M&A process.
- Representations (Reps) and Warranties
Reps and warranties are a list of declarations made by one party to another, found in the definitive agreement. The purpose of reps and warranties is to itemize all the represented facts of the party, which they will be held liable if found untrue or inaccurate. The damaged party will most likely claim indemnity.
Indemnification basically means claiming the indemnity clause. This clause states that one party should absorb the other party's losses due to their negligence or false information. Indemnity is usually tied to reps and warranties.
For example, let’s say it was stated in the reps and warranties that the seller has no existing legal problems. If that turns out to be false, any subsequent damage or costs will be shouldered by the seller because of the indemnification clause.
- Gun Jumping
Gun jumping is a law provision that prohibits the buyer and the seller to act as one entity before the deal formally closes. There should be no joining decision-making or influencing each other's day-to-day operations.
Antitrust is a governing body that promotes competition and limits the market power of any business to prevent them from dictating market prices. Antitrust law is usually the last permission a company needs to acquire a company, and the antitrust has the power to stop an acquisition if they see fit.
A contract clause that prohibits a person or an entity from competing with the other party for a specific time.
This contract clause states that one party cannot poach, entice or recruit the clients, customers, suppliers, or employees of the other party for a specific period.
Non-dealing means that one party cannot deal with the existing clients, customers, suppliers, or employees of the other party for a specific period.
- Breakup Fees
Breakup fees also known as the termination fee, is a contract provision used as leverage on the seller against backing out of an acquisition. If they change their mind after signing the contract, they will have to pay a breakup fee.
- Take-back Provisions
This is a contract clause that allows the recovery of money or stock already paid, back to the company. Clawback is another term to describe this provision. Take-back provisions are common in employment contracts where the company can reclaim compensation paid to the employee should there be any illegal activity or misconduct.
Insolvency is a state where a company or an individual cannot pay their debts. If this situation extends longer than anticipated, it can lead to bankruptcy.
On the other hand, bankruptcy is an actual court order that depicts how an insolvent person or business will pay off its creditors or how they will sell its assets to make the payments.
These are just some of the most basic M&A terminologies that you will often hear in a transaction. Hopefully, this article will help you understand some of the technicalities involved in the M&A industry. If you need more help in M&A, you can learn more about the M&A industry here: