M&A and Corporate Finance Glossary

Accretion: An improvement in per share metrics post-transaction (after issuing additional shares).

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.

Acquisition: The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive.

Acquisition Premium: The difference between the price paid for a company and its estimated real value.

Adjusted Earnings: 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/Consolidation: The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.

Asset Acquisition / Deal / Sale: The acquirer purchases only the assets of the target company (not its shares).

Asset-Based Approach: 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.

Asset-Based Lending: A method of financing in which a business loan is secured using company assets as collateral.

Backward Integration: A form of acquisition in which the target company produces raw materials or other supplies required by the acquirer to operate.

Base Year: The earliest year in a set of years used to calculate a financial trend.

Basket: A collection of securities (typically fifteen or more) grouped together for simultaneous purchase or sale. Often used as a part of program trading.

Black Knight: A company that makes an unwanted takeover offer (hostile takeover) to a target.

Blue Sky: Any amount paid for a company exceeding combined assets and goodwill.

Book Value: The value of a company as determined by subtracting intangible assets and liabilities from total assets.

Bootstrap Effect: 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.

Bucket: The total amount of the aggregate losses due to all breaches of the warranties that must have been reached for the buyer to be entitled to compensation. If the bucket is set at CHF 100,000 and de minimis at CHF 10,000 there must be losses each amounting to at least CHF 10,000 totalling CHF 100,000 before the buyer is entitled to compensation. Whether the bucket shall “fall over” (i.e., the full amount of all aggregated losses shall be payable) or only “spill over” (i.e., only the amount exceeding SEK 1,000,000 shall be payable) is a matter of negotiation. De minimis and bucket can be compared with the deductible of an insurance.

Business Cycle: 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.

Business Valuation: 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.

Capital Structure: The unique combination of debts, equities, and hybrid securities through which a company finances its assets.

Capitalization: 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.

Capitalization Ratio: 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.

Cap: The maximum aggregate amount payable due to breaches of warranties. This may for example be the purchase price, or a percentage of the purchase price. Certain fundamental warranties (such as that the seller is the owner of the shares and that these are all shares outstanding in the target company) are often exempted from the cap and other liabilities.

Cash Consideration: The percentage of the purchase price of a company to be paid to the target in cash.

Cash Flow: 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.

Circular merger: 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.

Clandestine Takeover: A takeover strategy in which an acquirer slowly and quietly purchasing shares in a target with the ultimate goal of accumulating a controlling stake.

Collar: An investment strategy that limits potential negative outcomes.

Common Stock: A form of security representing partial ownership of a company. Common stocks are the most basic building blocks of the stock market.

Compensation Manipulation: 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.

Competitive Bid: 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.

Conglomerate Merger: A merger of companies with seemingly unrelated businesses.

Consulting Agreement: 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.

Continuing Operations: A net income category found in income statements, continuing operations include all expenses necessary to the daily business activities of a company.

Conversion Price: The price at which a common stock can be obtained in trade for other assets, commonly bonds or preferred shares.

Covenant: 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.

Creeping Takeover: Acquirer slowly, over a period of time, buys the shares of the target in the stock market to gain a controlling interest in the company.

Crown Jewels: 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: Target selling the most valuable parts of the company (crown jewels) if a hostile takeover occurs. This deters acquirers from pursuing the hostile takeover.

Dawn Raid: A takeover attempt that buys all available shares of the target company at the current market price as soon as the stock exchange is open for business.

De Minimis: The minimum amount of an individual loss due to a breach of the warranties. If the de minimis is set to CHF 10,000, this entails that an individual breach of warranty causing a loss for the company of less than CHF 10,000 will not be considered at all. De minimis and bucket can be compared with the deductible of an insurance.

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.

Deal Structure: The combination of assets with which an acquisition is financed—can include cash, stocks, notes, consulting agreements, etc.

Debt Issuance Fees: Underwriting fees charged by investment banks to issue debt in connection with the transaction.

Defensive Merger: 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.

Dilution: A worsening of per share metrics post-transaction (after issuing additional shares).

Divestiture: 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.

Due Diligence: The formal process by which an acquirer investigates a target company’s finances before signing an acquisition agreement.

EBIT: Acronym standing for Earnings Before Interest and Tax. Calculated by subtracting operating costs from total revenue.

Earnout: A provision included in some acquisition agreements obligating the the acquirer to make additional payments based on the future performance of the company sold.

Economic Life: The span of time over which an entity expects an asset to remain viable.

Economies of Scope: A gain of more specialized skills or technology due to a merger.

Economy of Scale: Term reflecting the proportional decrease in operating costs accomplished by increasing production.

Empire Building: 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.

Fair Value Adjustments: The increase or decrease in the net book value of assets to arrive at the fair market value.

Financial Buyer: A company primarily interested in acquiring for purposes of increased revenue or cash flow. Contrast with Strategic Buyer.

Flip-in: Target company’s shareholders can purchase more shares of its stock at a discount. This dilutes the stock, making it more expensive and difficult for a potential acquirer to obtain a controlling equity interest (more than 50% of voting shares).

Flip-over: Target company’s shareholders can buy the post-merger (acquirer) company’s stock at a discount. Target company is counterattacking by diluting the acquirer’s stock.

Forward Integration: A company acquires a target that either makes use of its products to manufacture finished goods or is a retail outlet for its products.

Friendly Mergers: Acquisitions and mergers taking place as a result of negotiation and mutual interest rather than hostile takeover.

Friendly Takeover: The board of directors and management of the target company approve of the takeover. They will advise the shareholders to accept the offer.

Fully Diluted Shares Outstanding: The total number of shares outstanding after all convertibles and options are exercised.

Godfather Offer: An offer made by an acquirer to a target which is too good to refuse.

Golden Parachute: An employment contract that guarantees extensive benefits to executives if they are made to leave the company. This allows executives to remain in the company even after a merger.

Goodwill: An intangible benefit resulting when a company acquires a target at a premium.

Gray Knight: 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.

Greenmail: 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.

Holding company: A company formed to buy or hold majority shares in other companies.

Horizontal Merger / Horrizontal Integration: 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.

Identifiable Assets: All company assets—both tangible and intangible—which can be assigned a fair value.

Intangibles: 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.

Intrinsic Value: The estimated value of a business using discounted cash flow analysis (often on a per share basis).

Joint Venture: A business arrangement in which multiple parties combine resources in the pursuit of a common interest.

Junk Bond: A high-risk security, typically issued by companies seeking to raise capital quickly, or by those with poor credit history.

Killer Bees: Public relations firms, law firms, or investment bankers hired by a target company to help fend off a hostile takeover.

Leveraged Buyout: A form of buyout in which a management team uses their own company’s revenue to secure a loan to buy it.

Liquidation Value: The cash value available if the assets of a company were sold.

Lobster Trap: Restricting individuals with large amounts of convertible securities from converting if by doing so the individual is going to hold 10% or more of the target’s shares.

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.

Merchant Banker: The bank which brokers an M&A transaction.

Merger/Statutory: The purchasing company acquires all of the target company shares/assets; the target company ceases to exist (acquirer survives).

Net Asset Value: The value of a company’s assets minus its liabilities. Often calculated on a per share basis.

Offer Price: The price per share offered by an acquirer to a target.

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

Pac-Man Strategy: A takeover defense strategy in which the target company attempts to take over the hostile acquirer.

Par Value: The face value of a bond.

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.

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.

Poison Put: Target companies allow bondholders to sell bonds back at a premium to make hostile takeovers costlier.

Porcupine Provision or Shark Repellent: Any strategy used by a company to discourage hostile takeover.

Pro Forma Earnings per Share: The predicted earnings per share should an intended merger or acquisition proceed according to plan.

Pro Forma Shares Outstanding: The number of shares outstanding after the transaction has closed and additional equity has been issued.

Program Trading: 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.

Proxy Fight or Proxy Battle: A shareholder insurrection against corporate governance. Occurs when enough shareholders get together to win a corporate vote.

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.

Quick Ratio or Acid Test: A measure of liquidity obtained by dividing liquid assets by total liabilities.

Reconstruction: A corporate action in which a company substantially restructures its debts in order to mitigate financial harm and improve business functioning.

Restructuring Charges: 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.

Revenue Enhancements: Increases in revenue that are expected due to cross-selling, up-selling, pricing changes, etc.

Sandbagging: Target company playing along with the hostile bid and stalling for time while waiting for a white knight to appear.

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.

Sensitivity Analysis: A method of testing how sensitive certain outputs in a financial model are to changes in certain assumptions.

Share Deal or Stock Deal: A form of acquisition in which the acquirer purchases the stocks of a target rather than its assets.

Share Exchange Ratio: The offer price divided by the acquirer’s share price.

Share Issuance Discount: Any discount (if any) to the current market price that will be used to determine the number of shares the target receives.

Share/Stock Deal: The acquirer purchases all the shares of the target (and assumes all assets and liabilities).

Show-stopper: Target starting litigation to thwart an attempt at a takeover.

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.

Split Off: 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.

Split Up: The division of a company into two or more parts through stock transfer.

Squire: A squire is a third party

Stock Consideration: The portion of the purchase price of company paid in shares of the acquirer’s stock.

Strategic Buyer: A company primarily interested in acquiring to enhance company functions, processes, or infrastructure. Contrast with Financial Buyer.

Subsidiary: 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.

Suicide Pill / Poison Pill: 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.

Supermajority Amendment: A requirement that a very large percentage of shareholders approve of major decisions of the company – an attempt to fend off hostile takeovers.

Swap Ratio: The ratio at which an acquiring company will offer its own shares in exchange for those of the target company.

Synergies: Cost savings or revenue enhancements anticipated as the result of a merger or acquisition.

Tail Period: A tail period is the time during which an investment banker working on a company’s sale is entitled to payment, even after termination of services, if the deal closes within the period. It is a provision in the engagement letter and is found under clauses relating to termination of services

Takeover: A type of acquisition in which a company attempts to gain ownership of a target, usually by acquiring a controlling interest in its stock.

Takeover Bid: A corporate action in which an acquiring company offers to buy the stock of a target company and take over its business.

Takeover Premium: The percentage above the target’s current share price (or VWAP) the offer price represents.

Target: The firm that is being acquired (the seller).

Tender Offer: 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.

Timing of Synergies: How long it is estimated to take to realize the synergies in the transaction.

Toehold Position: Purchasing less than 5% of a company’s shares – to obtain a significant equity position, perhaps aiming to eventually gain a controlling interest, but a small enough purchase to avoid having to notify regulatory authorities.

Transaction Close Date: The date on which the transaction is expected to be officially completed.

Vertical Merger / Vertical Integration: A merger of two companies operating in different stages of the production process in the same industry.

Volume Weighted Average Price (VWAP): Volume Weighted Average Price, often used in reference to the takeover premium (e.g., 15% above the 20-Day VWAP).

White Knight Defense: A friendly takeover bidder that outbids the Black Knight.

White Squire Defense: An ally of the target company that does not buy enough shares to gain a controlling interest, but enough to prevent the hostile takeover acquirer from gaining a controlling interest.