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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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.
Transitional Service Agreement (TSA)
A Transitional Service Agreement (TSA) is an agreement used when an organization or part of an organization is sold to another company. The agreement is used to facilitate a smooth administrative transition between owners. TSAs cover all elements of the business’ operations, from payroll to procurement. In a TSA, the new owner of the organization effectively pays the seller for services provided to the acquired organization until those services can be provided by the new owner.
Employee Stock Ownership Plan (ESOP)
A benefit plan providing workers with a stock interest in the employing company.
Partial Bid or Partial Tender Offer
A bid issued to purchase a predetermined number of shares in a company at above market price, often as part of a hostile takeover.
A business arrangement in which multiple parties combine resources in the pursuit of a common interest.
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 formed to buy or hold majority shares in other companies.
A company primarily interested in acquiring for purposes of increased revenue or cash flow. Contrast with Strategic Buyer.
A company primarily interested in acquiring to enhance company functions, processes, or infrastructure. Contrast with Financial Buyer.
Acquiree or Target
A company purchased or otherwise taken-over during an acquisition or merger.
A company that makes an unwanted takeover offer (hostile takeover) to a target.
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 company which is owned or controlled by another firm but is left to operate largely on its own terms to preserve branding or customer base.
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 corporate action in which a company substantially restructures its debts in order to mitigate financial harm and improve business functioning.
A corporate action in which an acquiring company offers to buy the stock of a target company and take over its business.
A corporate strategy involving the acquisition of or merger with other firms to forestall a market downturn or impending takeover.
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.
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.
Deferred Financing Cost or Debt Issuance Cost
A fee or commision paid to an investment bank in exchange for their issuance of debt.
Cash Flow Statement
A financial statement displaying comprehensive data regarding incoming and outgoing cash flows in a business.
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 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 form of acquisition in which the acquirer purchases the assets of a target rather than its stocks.
Share Deal or Stock Deal
A form of acquisition in which the acquirer purchases the stocks of a target rather than its assets.
A form of acquisition in which the target company produces raw materials or other supplies required by the acquirer to operate.
A form of buyout in which a management team uses their own company’s revenue to secure a loan to buy it.
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 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.
A form of security representing partial ownership of a company. Common stocks are the most basic building blocks of the stock market.
A high-risk security, typically issued by companies seeking to raise capital quickly, or by those with poor credit history.
A hostile takeover defense strategy which requires a supermajority of voting stockholders (from 67% up) to approve a merger.
A large payment or other financial compensation guaranteed to high-level executives should they be dismissed as the result of a merger or takeover.
Business Judgement Rule
A legal framework protecting companies from litigation, prosecution, or other legal action resulting from unpopular operational decisions.
Quick Ratio or Acid Test
A measure of liquidity obtained by dividing liquid assets by total liabilities.
A merger between two companies in different industries.
A merger between two companies in the same industry.
A merger of two companies operating in different stages of the production process in the same industry.
A method of analyzing equation inputs to determine their effect on output variables.
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.
A method of corporate reorganization in which shareholders of a parent company are offered to exchange their stock for shares in a new subsidiary or affiliate.
A method of financing in which a business loan is secured using company assets as collateral.
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.
Capital Asset Pricing Model
A model used to calculate the necessary rate of return on a potential asset to justify acquiring it.
A net income category found in income statements, continuing operations include all expenses necessary to the daily business activities of a company.
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.
A porcupine provision which prevents any shareholder with a 10% or greater interest in a company from converting their securities into voting stock.
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.
A provision included in some acquisition agreements obligating the the acquirer to make additional payments based on the future performance of the company sold.
A public offer to the shareholders of a company to sell their stock at a specified price during a specified window of time. The offered buy price is typically higher than the market rate to encourage shareholders to sell.
A recurring cycle of economic expansion and contraction, typically taking place over three to four years.
A reduction in the percentage of company ownership of stock caused by the release of new shares into the market.
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.
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 series of metrics/indicators which measure the proportion of debt in a company’s total capital structure.
Proxy Fight or Proxy Battle
A shareholder insurrection against corporate governance. Occurs when enough shareholders get together to win a corporate vote.
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.
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.
Poison Pill or Shareholder Rights Plan
A specific variety of porcupine provision which involves offering discounted stock prices to existing shareholders in an attempt to make any hostile takeovers overly costly. Poison pill provisions are usually triggered when an unwanted bidder acquires a company standing in the range of ten to twenty percent.
A squire is a third party
A strategy by which a company willing forces itself into bankruptcy to avoid a hostile takeover. The most extreme of all hostile takeover defense strategies.
A takeover defense strategy in which the target company attempts to take over the hostile acquirer.
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 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.
Spin Off or Spin Out or Starburst
A type of a divestiture wherein a parent company sells off shares in an internal division being brought to public market.
A type of acquisition in which a company attempts to gain ownership of a target, usually by acquiring a controlling interest in its stock.
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.
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.
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 type of porcupine provision which allows bondholders to sell their bonds back at a premium, rendering a potential takeover costlier.
A type of securities trading carried out by a computer program. Typically consists of the simultaneous execution of baskets of stocks according to predetermined market conditions.
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.
Acquisitions and mergers taking place as a result of negotiation and mutual interest rather than hostile takeover.
Acronym standing for Earnings Before Interest and Tax. Calculated by subtracting operating costs from total revenue.
All company assets—both tangible and intangible—which can be assigned a fair value.
An acquisition in which the target company uses or retails goods produced by the acquirer.
An acquisition strategy motivated solely by perceived increases in prestige or status implicit in company growth.
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.
An intangible benefit resulting when a company acquires a target at a premium.
An investment strategy that limits potential negative outcomes.
An offer made by an acquirer to a target which is too good to refuse.
Any amount paid for a company exceeding combined assets and goodwill.
Hostile Takeover or Corporate Raid
Any merger or acquisition undertaken without the support of management at the target company.
Scorched Earth Policy
Any porcupine provision in which a company attempts to make itself less attractive to potential hostile takeovers by alerting its internal finances. This can include selling off assets or taking on high levels of debt, among other activities. Even in the event a takeover is averted, the target will still be damaged.
Porcupine Provision or Shark Repellent
Any strategy used by a company to discourage hostile takeover.
Cost savings or revenue enhancements anticipated as the result of a merger or acquisition.
Earnings and asset growth which occur due to business expansion.
Equity Issuance Fees or Stock Issuance Fees
Fees charged by investment banks to underwrite the release of new stocks to the market.
Firm or individual who helps a company prepare strategies to prevent hostile takeover.
Non-physical business assets including patents, trademarks, business methodologies, brand recognition and public goodwill.
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.
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.
One time costs associated with the acquisition of a new business. May include integration expenses, the cost of laying off employees or moving production plants or offices, etc.
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.
The amount by which a company’s net cash income exceeds its net cash expenses.
The attempted forestalling of a hostile takeover in the hopes that a white knight will appear.
The bank which brokers an M&A transaction.
Purchase Price Allocation
The breakdown of the total purchase price of a target company into expense categories such as goodwill, property, equipment, and net tangible assets.
The cash value available if the assets of a company were sold.