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The A to Z of M&A

Struggling to understand complex M&A terminology?
Here's a guide to some commonly used terms.

A & B

A Terms

Accretion: The increase in Earnings Per Share (EPS) post transaction.

Acquirer: A company that obtains the rights to another company or business relationship through a deal.

Acquisition: A transaction wherein one firm absorbs another firm via a takeover.

Amalgamation/Consolidation: A combination of 2 or more companies into a new entity.

Angel Investor: An individual who invests their personal capital in early-stage, potentially high-growth companies.

Asset Deal: When a buyer purchases the operating assets of a business instead of stock shares.


C Terms

Capital Asset Pricing Model (CAPM): A financial model that calculates the expected rate of return for an asset or investment.

Capital Expenditure (CAPEX): Money spent by a business or organization on acquiring or maintaining fixed assets, such as land, buildings, and equipment.

Capital Structure: The particular distribution of debt and equity that makes up the finances of a company.

Capitalization: The provision of capital for a company, or the conversion of income or assets into capital.

Cash Consideration: The use of cash as a payment option in exchange for an asset or during an M&A transaction.

Cash Flow: The amount of total money being transferred into and out of a business, especially as affecting liquidity.

Circular Merger: A transaction to combine companies that operate within the same general market but offer a different product mix.

Collar: A mechanism used in mergers to protect parties against certain risks associated with market fluctuations when a buyer’s stock comprises all or part of the merger consideration.

Compensation Manipulation: When the upper management of a company seeks out M&A with the sole intent of achieving growth to receive a corresponding increase in salary.

Confidential Business Profile/Review: A one/two page overview sent to target companies that highlights your investment opportunity to them

Confidential Information Memorandum (CIM): A comprehensive presentation that serves as a marketing document during an M&A process that outlines everything a potential buyer needs to know before submitting an initial offer.

Conglomerate: A corporation made up of several different independent businesses.

Continuing Operations: A term used in financial reporting to describe the activities of a business that have been ongoing or continuous since the financial statements were issued.

Covenant Not to Compete or Non-Compete Clause: An agreement where one party promises not to engage in conduct that would increase competition for the other part for a specific period of time.

Creeping Takeover: When one company slowly increases its share ownership of another.

Crown Jewels Defense: A strategy in which a company sells its most valuable assets so that it is no longer so attractive to a company it wants to avoid being sold to.


F Terms

Fair Value Adjustments: Accounting adjustments to mark the fair value of an asset or liability to the price that would be received to sell an asset, or paid to transfer a liability.

Financial Buyer: An acquirer that purchases a company as an investment to achieve a targeted return.

Flip-In: A strategy used by a target company to prevent or discourage a hostile takeover attempt.

Flip-Over: A tactic in which shareholders of the existing company are allowed to buy the shares of the acquiring company at a discount.

Forward Integration: A business strategy that involves a form of downstream vertical integration whereby the company owns and controls business activities that are ahead in the value chain of its industry.

Friendly Takeover: A scenario in which a target company is willingly acquired by another company.

Fully Diluted Shares Outstanding: The total common shares of a company counting not only shares that are currently issued and outstanding but also shares that could be claimed through the conversion of convertible preferred stock or through the exercise of outstanding options and warrants.

H Terms

Horizontal Integration: An expansion strategy that involves the acquisition of another company in the same business line.

Hostile Takeover or Corporate Raid: Occurs when an acquiring company attempts to take over a target company against the wishes of the target company's management.

B Terms

Backward Integration: A type of vertical integration and M&A corporate financial strategy in which businesses acquire or merge with raw materials inventory or parts suppliers in their supply chain.

Black Knight: A company that makes an unwelcome, hostile takeover bid.

Bootstrap Effect: A type of merger where the post-merger EPS is artificially increased although the merger has not provided true economic benefits to the acquirer company.

Business Cycle: A series of cycles of economic expansion and contraction.

Business Valuation: The process of determining the current worth of a business using objective measures and evaluating all aspects of the business.

D Terms

Dawn Raid: The practice of buying a large amount of shares right at the open of a day's trading, often with the intention of a takeover.

Dead-Hand Provision: A strategy utilized by a target company to ward off the advances of a hostile takeover. This is done by issuing stocks to all existing shareholders to dilute the percentage of ownership of the aspiring owners.

Deal Structure: Outlines a set of terms that will help guide a smooth transfer of business ownership.

Defensive Merger: When a company buys another as a "defense" against market downturns or possible takeovers.

Dilution: A reduction in earnings per share and book value per share due to an increase in the number of shares issued.

Discontinued Operations: An accounting term for parts of a firm's operations that have been divested or shut down.

Discount for Lack of Control: Allows investors who purchase a position in a company that affords them no actual control over the company's actions, decisions, or other affairs to benefit from a lower purchasing price.

Discount for Lack of Marketability: An amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability.

Discount for Lack of Voting Rights: The reduction in a company's share value due to a shareholder's lack of ability to exercise their control over the company

Divestiture: The action or process of selling off subsidiary business interests or investments.

Due Diligence: The process of verification, investigation, or audit of a potential deal or investment opportunity to confirm all relevant facts and financial information and to verify anything else that was brought up during an M&A deal or investment process.

E Terms

Earn Out: A contractual provision stating that the seller of a business is to obtain future compensation if the business achieves certain financial goals.

EBITA: Earnings before interest, taxes, and amortization.

Economic Life: The period of time during which an asset remains useful to its owner.

Economies of Scale: The advantages that can sometimes occur as a result of increasing the size of a business.

Economies of Scope: Efficiencies that a buyer may gain post-acquisition by increasing the scope of certain combined functions, such as marketing and distribution, to include additional products.

Empire Building: Based on the Empire Building Theory of M&A, which states that managers tend to make mergers in order to make their empires larger and increase their control over the company.

Equity Issuance Fees: An insurance or assurance policy in which premiums are invested partially or wholly in ordinary shares for the eventual benefit of the beneficiaries of the policy.

Exclusivity (No-Shop) Requirement: A document that prohibits a seller from soliciting alternative transactions and also usually also prohibits the seller from supplying due diligence information to or negotiating with other potential buyers.

Exchange Ratio: Measures the number of shares the acquiring company has to issue for each individual share of the target firm.

Exit Strategy: A plan for a partner or owner to transition out of ownership of a company.

G Terms

Godfather Offer: An irrefutable takeover bid made to a target company by an acquirer.

Golden Parachute: A large financial compensation or substantial benefits guaranteed to company executives upon termination following a merger or takeover.

Goodwill: The financially justifiable portion of the purchase based on the company’s processes and procedures, name recognition, recurring clientele, etc; AKA Blue Sky.

Gray Knight: A secondary, separate party to the first bidder and target company.

Greenmail: An intentional purchase of a substantial number of shares in an entity with the ultimate objective of threatening it with a hostile takeover.


I Terms

Identifiable Assets: An asset whose commercial or fair value can be measured at a given point in time, and which is expected to provide a future benefit to the company.

Indication of Interest (IOI): A brief letter or notice that expresses a buyer's interest in buying a security in registration or a company's interest in acquiring another company.

Intrinsic Value: The present value of all expected future cash flows, discounted at the appropriate discount rate.

J Terms

Joint Venture: An entity where two or more companies combine certain assets and work together to achieve a particular business objective.

K Terms

Killer Bees: Companies or individuals that help target firms avoid being taken over. They devise anti-takeover defense strategies that make the target more costly or difficult to acquire.


L Terms

Letter of Intent (LOI): A written expression of the parties' intent to enter into a transaction and a summary of the material terms of the deal.

Leveraged Buyout (LBO): The acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition.

Liquidation Value: The net value of a company's physical assets if it were to go out of business and the assets sold.

Lobster Trap: A strategy used to protect small companies against hostile takeovers initiated by larger corporations in which the shareholders with more than 10% stock in the company cannot convert their securities to voting stock.

O Terms

Offer Price: The price paid by an acquirer for the stock of a target company.

Other Closing Costs: This may include due diligence fees, legal fees, accounting fees, etc. related to the deal.

P Terms

Pac Man Defense: A defensive tactic used by a targeted firm in a hostile takeover situation where the target firm tries to acquire the firm that attempted a hostile takeover.

Par Value: The value of a single common share as set by a corporation's charter.

Pari Passu: A Latin-derived term meaning “equal footing,” and is used in a wide range of legal agreements to refer to parties having equal rights.

Platform Company: The initial acquisition made by private equity that will serve as the foundation for a roll-up of other companies acquired in the same industry

Poison Pill: When the target’s existing shareholders are given the right to purchase more shares at a discounted price to prevent a hostile takeover.

Poison Put: A  takeover defense strategy in which the target company issues a bond that investors can redeem before its maturity date.

Portfolio Company: A company (public or private) in a venture capital firm, buyout firm, or holding company owns equity.

Post-Money Valuation: A company's estimated value after receiving outside investment or financing.

Preferred Stock: Stock that gives its holders certain rights, preferences and privileges over holders of common stock and other securities.

Pre-Money Valuation: The value of a company before it goes public or receives other investments such as external funding or financing.

Pro Forma Earnings Per Share: The calculation of EPS assuming a merger and acquisition (M&A) takes place and all financial metrics, as well as the number of shares outstanding, are updated to reflect the transaction.

Program Trading: The purchase or sale of a group of 15 or more stocks that have a total market value of $1 million or more, and are part of a coordinated trading strategy.

Proxy Fight: An effort by the shareholder or group of shareholders of a corporation to convince other shareholders to cast their corporate votes the way the urging shareholders prefer as a means to secure the number of votes to achieve a desired result.

Purchase Price Allocation: An acquisition accounting process of assigning a fair value to all of the acquired assets and liabilities assumed by the target company.

T Terms

Tag-Along Rights (TARs): Legal agreements allowing minority stakeholders to sell shares under the same conditions as a majority stakeholder.

Takeover Premium: The difference between the market price (or estimated value) of a company and the actual price paid to acquire it, expressed as a percentage.

Target (Acquiree): A company chosen as an attractive merger or acquisition option by a potential acquirer.

Tender Offer: An active and widespread solicitation by a company or third party (often called the “bidder” or “offeror”) to purchase a substantial percentage of the company's securities.

Term Sheet: A document which outlines the key terms of a proposed transaction. The term sheet is typically nonbinding, except for certain provisions.

Timing of Synergies: When the synergistic effects are expected to occur or be most apparent.

Toehold Position: An accumulation of less than 5% of a target firm's outstanding stock by another company or individual investor with a particular goal in mind.

Transaction Close Date: The date on which a transaction is completed.

M Terms

Mandatory Bid Rule: Under this, an acquirer of a controlling stake in a listed company has to offer to the remaining shareholders a buy-out of their minority stakes at a price equal to the consideration received by the incumbent controller.

Merger/Statutory: When two or more businesses form a new, third entity.

Multiple: A ratio that is calculated by dividing the market or estimated value of an asset by a specific item on the financial statements.

N Terms

Net Book Value of Assets: The value at which a company reports an asset on its balance sheet.

Net Debt: Shows how much cash would remain if all debts were paid off and if a company has enough liquidity to meet its debt obligations. This is calculated by subtracting a company's total cash and cash equivalents from its total short-term and long-term debt.

Normalized Earnings: A company's earnings that omit the effects of nonrecurring charges or gains.

Q Terms

Quick Ratio or Acid Test: A measure of a company's liquidity, which is its ability to pay its short-term obligations using only its most liquid assets. It is calculated by dividing the sum of a company's cash, cash equivalents and marketable securities by its total current liabilities.

R Terms

Recapitalization: The process of restructuring a company's debt and equity mixture, often to stabilize a company's capital structure.

Reconstruction: When a company makes significant changes to its financial or operational structure, typically while under financial duress.

Restructuring Charges: Expenses that a company pays while reorganizing its operations.

Rollover Equity: A portion of an owner's interest or stake in the business that's reinvested into the new or acquiring company during a sale.

Roll-up Strategy: The process of acquiring and merging multiple smaller companies in the same industry.

S Terms

Sandbagging: A practice often employed by buyers in M&A to claim a breach of a seller representation or warranty (a “rep or warranty”) and seek indemnification post closing from the seller, in spite of the buyer having known about the breach.

Scorched Earth Policy: A last-ditch attempt to deter a hostile takeover by making the target company unattractive to the potential acquirer.

Sensitivity Analysis: A  financial model that determines how target variables are affected based on changes in other variables known as input variables.

Share/Stock Deal: When shares of one company are traded for another during an acquisition.

Show-Stopper: The legal methods framed to help individuals and firms prevent or stop a takeover.

Split Off: A corporate reorganization method in which a parent company divests a business unit using specific structured terms.

Split Up: A corporate action in which a single firm is split into two or more independent, separately-administered companies.

Strategic Buyer: A company that acquires another company in the same industry to capture synergies.

Subsidiary Merger: A type of merger that occurs when the acquiring company uses its subsidiary company to acquire a target company.

Supermajority Amendment: A defensive tactic that involves an amendment to the corporate charter requiring that a substantial majority, usually 67% and sometimes as much as 90% of shareholders must be in favor.

Swap Ratio: A ratio at which an acquiring company will offer its own shares in exchange for the target company's shares during a merger or acquisition.

Synergy: The concept that the combined value and performance of two companies will be greater than the sum of the separate individual parts.

V Terms

Vertical Integration: A merger between two companies that produce different products or services along the supply chain toward the production of some final product.

VWAP (volume weighted average price): A measurement that shows the average price of a security, adjusted for its volume.

W Terms

Warrants: A derivative security that gives the holder the right to purchase securities (usually common stock) from the issuer at a specific price within a certain timeframe.

White Knight Defense: A hostile takeover defense whereby a 'friendly' individual or company acquires a corporation at fair consideration when it is on the verge of being taken over by an 'unfriendly' bidder or acquirer.

White Squire: An investor or company that takes a stake in a company to prevent a hostile takeover.


Definitions taken from Corporate Finance Institute. Original article here.

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