A comprehensive glossary of the most important terms and concepts in the M&A world, providing simple definitions.
General M&A Terms
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Earnings and asset growth which occur due to business expansion.
Acquiree or Target
A company purchased or otherwise taken-over during an acquisition or merger.
Acquirer or Buyer or Offeror
The company undertaking the merger or acquisition of another company.
The purchase of the controlling interest in or ownership of one company by another.
The difference between the price paid for a company and its estimated real value.
A method of assessing financial performance which compensates for atypical profits and expenses, such as capital gains, new investments, tax liabilities, loss revenues, etc. By removing such factors—factors that are not a part of a company’s typical financial workings—the adjusted earnings metric is intended to more accurately reflect financial robustness.
Amalgamation or Consolidation
An amalgamation occurs when two or more companies blend together to form a new entity. It is a distinct from a merger because none of the amalgamating companies survive as independent legal entities.
A form of acquisition in which the acquirer purchases the assets of a target rather than its stocks.
A form of acquisition in which an acquirer purchases a target company’s assets without purchasing the company itself. The seller must therefore settle all existing liabilities and debts before taking the net cash proceeds.
A company valuation metric in which total liabilities are subtracted from Net Asset Value. Used primarily to determine what it would cost to re-create a business.
A method of financing in which a business loan is secured using company assets as collateral.
A form of acquisition in which the target company produces raw materials or other supplies required by the acquirer to operate.
The earliest year in a set of years used to calculate a financial trend.
A collection of securities (typically fifteen or more) grouped together for simultaneous purchase or sale. Often used as a part of program trading.
A company that makes an unwanted takeover offer (hostile takeover) to a target.
Any amount paid for a company exceeding combined assets and goodwill.
The value of a company as determined by subtracting intangible assets and liabilities from total assets.
A short-lasting illusory boost in earnings per share which occurs when a company acquires a target trading on a lower price-to-earnings ratio.
A recurring cycle of economic expansion and contraction, typically taking place over three to four years.
Business Judgement Rule
A legal framework protecting companies from litigation, prosecution, or other legal action resulting from unpopular operational decisions.
The process of determining the economic value of a company.
Capital Asset Pricing Model
A model used to calculate the necessary rate of return on a potential asset to justify acquiring it.
The unique combination of debts, equities, and hybrid securities through which a company finances its assets.
The total sum of a company’s stock, debt, and earnings.
Capitalization Factor or Capitalization Rate or Cap Rate
A value metric representing the income expected from an investment, computed as the inverse of the expected rate of return.
A series of metrics/indicators which measure the proportion of debt in a company’s total capital structure.
Capitalizing Net Income or Capitalization of Earnings
A method of valuing a business in which the company’s expected future earnings are divided by the Capitalization Factor.
The percentage of the purchase price of a company to be paid to the target in cash.
The amount by which a company’s net cash income exceeds its net cash expenses.
Cash Flow Loan
A type of business loan in which a company’s cash flow is determined by the lending bank to constitute sufficient collateral.
Cash Flow Statement
A financial statement displaying comprehensive data regarding incoming and outgoing cash flows in a business.
One of the three traditional forms of merger, a circular merger occurs when a company acquires targets in the same or related industries in order to diversify its product offering.
A takeover strategy in which an acquirer slowly and quietly purchasing shares in a target with the ultimate goal of accumulating a controlling stake.
A Clean Team is a group of people who operate under certain protocols prior to regulatory approval and deal closure. This special group of people can assemble, review and analyze sensitive, competitive or other confidential data between the two companies before that information can be widely shared. Clean teams are especially useful in carve-outs or acquisitions of public companies where the acquiring organization is a competitor.
An investment strategy that limits potential negative outcomes.
A form of security representing partial ownership of a company. Common stocks are the most basic building blocks of the stock market.
Occurs when the upper management of a company seeks out mergers and acquisitions with the intent of achieving growth solely in order to receive a corresponding increase in salary.
When the decision is made to take a company public, sealed bids—known as competitive bids—are collected from investment banks prior to the initial public offering. The bank who offers the most favorable terms is given the contract to take the company public and broker the IPO.
Confidential Business Profile or Confidential Business Review
A confidential marketing document circulated among potential buyers of a for sale company. The CBP gives an overview of the financial workings of the target company and is usually only distributed following the completion of a non-disclosure agreement.
A merger between two companies in different industries.
A term-of-sale in M&A requiring select staff members of the target company (usually upper management) to stay on as consultants for a predetermined span of time.
A net income category found in income statements, continuing operations include all expenses necessary to the daily business activities of a company.
The price at which a common stock can be obtained in trade for other assets, commonly bonds or preferred shares.
A promise or obligation included in an indenture or other compulsory form of contract. A covenant guarantees that certain actions will or will not be taken out. They are often stipulated by creditors as a part of the business loan process.
Covenant not to Compete or Non-Compete Clause
A covenant, often found in acquisition agreements, that prohibits the seller from engaging in future business in competition with the entity being sold.
The most highly valued aspects of a business as seen in terms of asset value and profitability. The crown jewels are what set a company a part from its peers—its best product, its most powerful service. Sometimes a buyer acquires a target company solely to gain access to its crown jewels, with no intention of integrating the rest of the target’s assets.
Crown Jewels Defense
A scorched earth hostile takeover defense in which a company sells off its crown jewels in order to forestall an acquisition.
A form of hostile takeover in which the would-be acquirer attempts to buy all outstanding shares of a target’s stock as the market opens in the morning.
Dead Hand Provision
A special type of poison pill in which the stock position of the bidder is massively diluted by issuing new stock to every shareholder but them.
The combination of assets with which an acquisition is financed—can include cash, stocks, notes, consulting agreements, etc.
A corporate strategy involving the acquisition of or merger with other firms to forestall a market downturn or impending takeover.
Deferred Financing Cost or Debt Issuance Cost
A fee or commision paid to an investment bank in exchange for their issuance of debt.
Demerger or corporate split or division
A demerger occurs when a branch or division within a business is split off to form its own company. In the case of public companies, some stock is transferred to the new entity.
A reduction in the percentage of company ownership of stock caused by the release of new shares into the market.
The sale of a segment of a company to an outside party. Distinct from a demerger because the assets in question are liquidated and do not continue to exist as an independent company.
The formal process by which an acquirer investigates a target company’s finances before signing an acquisition agreement.
Acronym standing for Earnings Before Interest and Tax. Calculated by subtracting operating costs from total revenue.
A provision included in some acquisition agreements obligating the the acquirer to make additional payments based on the future performance of the company sold.
The span of time over which an entity expects an asset to remain viable.
Economy of Scale
Term reflecting the proportional decrease in operating costs accomplished by increasing production.
Economy of Scope
Term reflecting the savings realized by manufacturing multiple goods together instead of separately.
An acquisition strategy motivated solely by perceived increases in prestige or status implicit in company growth.
Employee Stock Ownership Plan (ESOP)
A benefit plan providing workers with a stock interest in the employing company.
Enterprise Value (EV)
The value of a company calculated as market capitalization plus long-term debt minus cash and short-term investments. Intended to represent the total cost an acquirer would pay to take over a business.
Equity Carve Out or Split-off IPO
A type of demerger in which a company creates a new entity out one of its subgroups to offer in an IPO. The parent company retains management control.
Equity Issuance Fees or Stock Issuance Fees
Fees charged by investment banks to underwrite the release of new stocks to the market.
Excess Purchase Price
The difference between the price paid for a company and the total sum of its assets.
Exercise Price or Strike Price
The price per share at which the owner of a stock is authorized to sell or trade their position.
Fair Market Value
The price of an asset when both buyer and seller are approaching the transaction from a well-informed and unpressured position.
A company primarily interested in acquiring for purposes of increased revenue or cash flow. Contrast with Strategic Buyer.
A type of poison pill which allows existing shareholders to buy target company stock at a discounted rate in the event of an attempted takeover.
A poison pill strategy allowing existing target company shareholders to buy acquiring company stock at a discounted rate in the event of a successful takeover.
An acquisition in which the target company uses or retails goods produced by the acquirer.
Acquisitions and mergers taking place as a result of negotiation and mutual interest rather than hostile takeover.
Fully Diluted Shares Outstanding
The total number of shares outstanding after all convertibles and options are exercised.
An offer made by an acquirer to a target which is too good to refuse.
A large payment or other financial compensation guaranteed to high-level executives should they be dismissed as the result of a merger or takeover.
An intangible benefit resulting when a company acquires a target at a premium.
A follow-up bidder in a public offering which attempts to take advantage of problems between the target and initial bidder. The gray knight often offers itself as an alternative to the black knight in an attempted hostile takeover.
A form of extortion in which a substantial block of shares in a business is purchased by an unfriendly company, which then forces the target company to repurchase the stock at an inflated price to prevent takeover.
A company formed to buy or hold majority shares in other companies.
A merger between two companies in the same industry.
Hostile Takeover or Corporate Raid
Any merger or acquisition undertaken without the support of management at the target company.
House of Issue
The investment bank that underwrites an IPO.
All company assets—both tangible and intangible—which can be assigned a fair value.
Non-physical business assets including patents, trademarks, business methodologies, brand recognition and public goodwill.
Interlocking Shareholdings or Cross Shareholdings
The mutual exchange of shares between a group of companies—meant to bond the companies together without actually merging them.
The value of a company according to a close analysis of its finances rather than its market rate.
A business arrangement in which multiple parties combine resources in the pursuit of a common interest.
A high-risk security, typically issued by companies seeking to raise capital quickly, or by those with poor credit history.
Firm or individual who helps a company prepare strategies to prevent hostile takeover.
A form of buyout in which a management team uses their own company’s revenue to secure a loan to buy it.
The cash value available if the assets of a company were sold.
A porcupine provision which prevents any shareholder with a 10% or greater interest in a company from converting their securities into voting stock.
Mandatory Bid Rule
A rule obligating a new majority shareholder in a business interest to offer to buy any outstanding shares at a fair price.
The bank which brokers an M&A transaction.
The fusion of two or more existing companies into one new entity.
Net Asset Value
The value of a company’s assets minus its liabilities. Often calculated on a per share basis.
Net Book Value
The value at which a company records its assets in its accounting records.
The price per share offered by an acquirer to a target.
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