M&A Glossary and Terms
Welcome to CFI’s M&A Glossary of terms and definitions for mergers & acquisitions transactions.
These terms are taken from CFI’s advanced financial modeling course on mergers and acquisitions modeling.
General M&A Terms
An improvement in per share metrics post-transaction (after issuing additional shares).
The firm which is purchasing a company in an acquisition (the buyer).
The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive (both companies survive).
The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.
The acquirer purchases only the assets of the target company (not its shares).
A company acquires a target that produces the raw material or the ancillaries which are used by the acquirer. It intends to ensure an uninterrupted supply of high-quality raw materials at a fair price.
One of the poor reasons to make a merger. If the target’s P/E ratio is lower than the acquirer’s P/E ratio, the EPS of the acquirer increases after the merger; however, it is purely an accounting, numerical phenomenon, and no value or synergies are created.
The portion of the purchase price given to the target in the form of cash.
One of the poor reasons to make a merger. Management compensation is according to company performance benchmarked to other companies, so an increase in the size of the company often means an increase in salary for management.
A merger of companies with seemingly unrelated business.
Debt Issuance Fees
Underwriting fees charged by investment banks to issue debt in connection with the transaction.
A worsening of per share metrics post-transaction (after issuing additional shares).
Economies of Scale
Fixed costs decrease because merged companies can eliminate departments with repetitive functions.
Economies of Scope
A gain of more specialized skill or technology due to a merger.
One of the poor reasons to make a merger. Management decides to make a merger to increase the size of the company purely for the purpose of ego or prestige.
Equity Issuance Fees
Underwriting fees charged by investment banks to issue equity in connection with the transaction.
Excess Purchase Price
The value of the purchase price over and above the net book value of assets (total purchase price minus the net book value of assets).
Fair Value Adjustments
The increase or decrease in the net book value of assets to arrive at the fair market value.
The board of directors and management of the target company approve of the takeover. They will advise the shareholders to accept the offer.
A company acquires a target that either makes use of its products to manufacture finished goods or is a retail outlet for its products.
Fully Diluted Shares Outstanding
The number of shares a company has outstanding after options, convertible securities, etc., are exercised.
The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).
Merging of companies in the same lines of business. Usually to achieve synergies.
The board of directors and management of the target company o not approve of the takeover. They will advise the shareholders not to accept the offer.
An asset that can be assigned a fair value; can include both tangible and intangible assets.
The estimated value of the business using discounted cash flow analysis (often on a per share basis).
The purchasing company acquires all of the target company shares/assets; the target company ceases to exist (acquirer survives).
Net Book Value of Assets
Book value of assets minus book value of liabilities.
The price offered per share by the acquirer.
Other Closing Costs
This may include due diligence fees, legal fees, accounting fees, etc., related to the deal.
Pro Forma Shares Outstanding
The number of shares outstanding after the transaction has closed and additional equity has been issued.
Purchase Price Allocation
The breakdown of the total purchase price between net identifiable assets and goodwill.
Any fees or charges related to early debt repayments that are part of a restructuring.
Increases in revenue that are expected due to cross-selling, up-selling, pricing changes, etc.
A method of testing how sensitive certain outputs in the model are to changes in certain assumptions.
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 # of shares the target receives.
The acquirer purchases all the shares of the target (and assumes all assets and liabilities).
The portion of the purchase price given to the target in the form of shares of the acquirer’s stock.
Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.
Cost savings and revenue enhancements that are expected to be achieved in connection with a merger/acquisition.
The percentage above the target’s current share price (or VWAP) the offer price represents.
The firm that is being acquired (the seller).
Timing of Synergies
How long it is estimated to take to realize the synergies in the transaction.
Transaction Close Date
The date on which the transaction is expected to be officially completed.
Merging with companies that are in its supply chain; may be composed of both forward and backward integration.
Volume Weighted Average Price, often used in reference to the takeover premium (i.e. 15% above the 20-Day VWAP).
An unwelcome takeover bidder.
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.
A takeover attempt that buys all available shares of the target company at the current market price as soon as the stock exchange is opened for business.
Acquirer presents an attractive takeover that the target company cannot refuse. A godfather offer does not have negative implications that are usually associated with this type of takeover offers, including a change of the management team, asset stripping, or transfer of reserves.
Acquirer offers an attractive price to target shareholders to sell their shares in the case of a clean takeover bid.
Purchasing less than 5% of shares to avoid notifying the management.
Hostile Takeover Defenses
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.
The provision requires that anti-takeover defenses can only be canceled by a vote of the board, so acquirers who want to avoid the consequences of the defenses must receive approval from the board before initiating a takeover.
Target company’s shareholders can purchase stock at a discount.
Target company’s shareholders can buy the post-merger company’s stock at a discount.
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.
Target company repurchasing stock from the acquirer or a third party for a premium price to avoid the stock falling into the hands of the acquirer.
Target companies employing public relations firms, law firms, and investment bankers to fend off unfriendly takeovers.
Restricting individuals with large amounts of convertible securities to convert if by doing so the individual is going to hold 10% or more of the target’s shares.
Pac Man Defense
Target company of a hostile takeover turns around and acquire shares of the acquirer.
Target companies allow the purchase of stock at a discount to make hostile takeovers costlier.
Target companies allow bondholders to sell bonds back at a premium to make hostile takeovers costlier.
Target company playing along with the hostile bid and stalling for time while waiting for a white knight to appear.
Scorched Earth Policy
Target borrows money at extremely high interest rates to make takeovers unattractive. It’s a double-edged sword because although the takeover is prevented, the company is often destroyed.
Target starting litigation to thwart an attempt at a takeover.
A requirement that a very large percentage of shareholders approve of major decisions of the company in an attempt to fend off hostile takeovers.
White Knight Defense
A friendly takeover bidder that outbids the Black Knight.
White Squire Defense
An alliance that does not buy shares enough to gain a controlling interest, but enough to prevent the hostile takeover from gaining a controlling interest.
Thank you for reading CFI’s M&A Glossary of terms and definitions for understanding mergers and acquisitions. These terms were taken from CFI’s advanced Mergers and Acquisitions Modeling Course.
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