172 M&A Terms to Master Any Merger or Acquisition
In the corporate landscape, mergers and acquisitions, commonly known as M&A, are pivotal events that can redefine industries, shape market competition, and create extensive value for companies and stakeholders.
As the complexity of these transactions can be immense, mastering the terminology is crucial for all participants involved.
Let's embark on a comprehensive exploration of the critical terms that define mergers and acquisitions.
What is M&A?
M&A is an acronym for Merger and Acquisition and refers to the business strategies of dealing with the buying, selling, dividing, and combining of different companies. These strategies enable organizations to adjust their operations capacity smoothly, alter their business model, and strengthen their competitive stance.
In simpler terms, the best way to define a merger and acquisition is a big company buying a smaller company and assimilating its business.
A merger means strategically merging two entities into a single, typically larger company. It is often executed to enhance competitive standing, spread risks, or tap into business opportunities to enhance shareholder value.
An acquisition, on the other hand, is the process of one business purchasing another, which involves taking ownership of the target company's stock, equity interests, or assets. Unlike a merger, an acquisition usually does not result in the formation of a new company. Instead, the acquired company may be absorbed into the acquiring entity or run as a separate subsidiary.
Common Terms Used in M&A Deals
Here is a comprehensive list of all the terms used in M&A terminology that are crucial to define mergers and acquisitions:
Accretion
A financial term referring to growth or increase is often used to describe an acquisition's positive impact on the acquirer's per-share earnings.
Acquiree
The company being purchased or acquired in a merger or acquisition.
Acquirer
The company purchasing another company in a merger or acquisition.
Acquisition
The act of one company buying most or all of another company's shares to gain control of that company.
Acquisition Premium
The extra amount the acquirer pays over the current market price of the acquiree's shares.
Amalgamation
The process where two or more companies combine to form a new entity, often involving stock exchanges.
Anti-Dilution Provision
Protective clauses in an equity agreement that prevent the dilution of existing shareholders' stakes in the event of future capital raisings.
Asset Deal
An acquisition is is where the buyer purchases a company's individual assets and liabilities instead of its shares.
Asset Purchase
Similar to an asset deal - it's the purchase of the company's assets, like equipment, inventory, and property, rather than the company's stock.
Back-End Merger
A merger is where the target company shareholders receive cash or stock in the post-merger company instead of pre-merger.
Backward Integration
A strategic action where a company expands its role to complete production processes by acquiring or merging with its suppliers.
Blue Sky Laws
State laws in the United States regulate the offering and selling of securities to protect the public from fraud.
Breakup Fee
A fee paid to the potential acquirer if the deal falls apart, typically when the acquiree backs out for a better offer.
Buyer
The entity purchasing another company, assets, or securities.
Call Option
A financial contract giving the bearer the right to buy a stock or security at a specified price within a set time frame. However, the bearer is not obligated to do so.
Cap Table (Capitalization Table)
A spreadsheet or table that displays a company's securities, such as common equity shares, preferred equity shares, warrants, and convertibles. It shows the percentage ownership, equity dilution, and equity value in each investment round.
Capital Asset Pricing Model (CAPM)
A benchmark model used to determine an asset's theoretically appropriate required rate of return, discovering if the investment is worth the risk.
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Capital Expenditure (CAPEX)
Funds a company uses to acquire or improve assets such as property, industrial buildings, or equipment to improve its long-term capacity or efficiency.
Capital Structure
The mix of a company's long-term debt, specific short-term debt, common equity, and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds.
Capitalization
The total amount of securities issued by a company, including debt, equity, and other financial instruments, and the market value of such securities.
Carrying Value
Also known as book value, it is the value of an asset according to its balance sheet account balance. For assets, the value is based on the original cost and excludes any depreciation, amortization, or impairment costs.
Carve-out
When a parent company sells a minority (less than 50%) interest in a subsidiary to outside investors, creating a new, independent company.
Change of Control
An event that results in a significant change in the ownership structure of a company, often triggering specific clauses in agreements such as loans or employment contracts.
Change of Control Agreement
A contract that outlines the terms and conditions under which a business will change control. It often includes stipulations for employee retention and severance pay, among other things.
Closing
The final step in executing an M&A transaction after all relevant documents are signed, funds have been exchanged, and ownership is transferred.
Closing Conditions
Provisions in a contract detailing the conditions that must be met for the transaction to be completed at closing.
Collar Agreement
A merger agreement where the acquirer guarantees a specific price range of stock swap deals to ensure the merger's equity value remains within a particular band of values despite market fluctuations.
Compliance
In merger and acquisition terminology, it typically refers to operating according to the laws, regulations, and company policies that govern its activities.
Confidential Information Memorandum (CIM)
A document used in M&A that the selling company prepares to attract potential buyers; it provides detailed information about the business for due diligence purposes.
Confidentiality Agreement
Also known as a non-disclosure agreement (NDA), it's a legally binding contract between parties to ensure that sensitive information won't be shared with others.
Consolidation
It is the process of combining two or more entities into one, often to achieve more significant benefits.
Consortium
A group of companies formed to undertake an enterprise, which is usually beyond the resources of any single member.
Contingent Consideration
Additional payments made to the sellers of a company, dependent on specific future events such as reaching certain financial targets.
Control Block
A large block of shares sufficient to grant the holder significant influence or control over a company.
Control Person
An individual or entity that holds a control block and thus has significant influence or control over a company.
Control Premium
An additional payment above the current market value of shares, paid by a buyer to acquire a controlling interest in a company.
Cost Synergies
Cost savings resulting from the merging of companies due to efficiencies in operations, reductions in staff, or other factors.
Covenant
A clause in a financial contract that requires or forbids specific actions of the acquirer to protect the acquiree's interests.
Covenant Not to Compete
A contract clause restricting a seller from starting or participating in a competitive business within a certain period and geographical area.
Cross-Border Merger
A merger involving companies in different countries, subject to multiple jurisdictions' legal and regulatory environments.
Cross-default Provision
A clause in a loan agreement that puts a borrower in default if they default on another loan with the same lender.
Cultural Integration
It is the process of blending diverse corporate cultures into a single, cohesive culture following a merger or acquisition.
Deal Valuation Methods
Various techniques are used to assess a company's financial value in a transaction, such as discounted cash flow (DCF) or comparable company analysis.
Definitive Agreement
A legal document that outlines the final terms and conditions between two parties for a merger, acquisition, or other significant transaction.
Divestiture
The process of selling off a portion of a company's assets or a subsidiary, often for strategic, regulatory, or financial reasons.
Drag-Along
A provision in an investment agreement allows the majority shareholders to press minority shareholders to join in the sale of a company.
Due Diligence
An investigation or audit of a potential investment. Companies perform due diligence to verify financials, contracts, and other material facts before mergers and acquisitions.
Due Diligence Checklist
A list utilized during due diligence to ensure pertinent aspects of a deal, such as legal status, financials, and operations, are reviewed.
Due Diligence Process
Steps investors or buyers take to vet a company before a transaction. It involves examining the company's records, operations, and law compliance.
Earned Equity
Shares given to an individual (typically an employee) as compensation for their work.
Earnest Money
An upfront deposit to a seller shows the buyer's willingness and faith in a transaction.
Earnings Per Share (EPS)
A value obtained by dividing a company's profit by the number of outstanding shares of its common stock, thus indicating the company's profitability.
Earnout
A contractual provision in an acquisition where the sellers earn additional compensation based on the company's future performance.
EBITDA
An acronym for - Earnings Before Interest, Taxes, Depreciation, and Amortization. It measures a company's overall financial performance and is an alternative to net income.
Economic Interest
The interest an individual or entity has in an asset, based on the potential to gain financially through cash flow, dividends, or sale of the asset.
Escrow
An arrangement where a third-party processor holds the funds and regulates payment for two parties involved in a transaction.
Exit Strategy
A strategy for a business owner or stakeholder to sell their stake in a company or terminate their investment in a project for profit or minimized loss.
Fair Market Value
It is an estimate of the appropriate market value of an asset based on what an informed buyer would likely pay to a willing seller.
Fairness Opinion
A report by an independent third party assesses whether a transaction's terms are fair from a financial point of view.
Financial Buyer
A type of buyer in an acquisition that is primarily interested in the return on investment. Private equity firms are common examples.
Forward Integration
A business strategy where a company controls the downstream process of its production. It's when a company decides to take control of the post-production processes, such as distribution and selling. For instance, a manufacturer might buy a retail store where its products are sold.
Full Ratchet
An anti-dilution provision for investors in case of down-round financing. It ensures that if new shares are issued at a lower price than an investor previously paid, they will receive additional shares as compensation to preserve their original investment value.
General Partner
In limited partnerships or investment funds, the general partner has management control, shares profits, and has unlimited personal liability for debts. They're active in daily operations, unlike limited partners.
Going Private
The process of a publicly traded company converting to a privately held one, often through purchasing outstanding shares. It often happens through a buyout by the company's management or a group of private investors.
Golden Parachute
A substantial financial benefit (severance pay, stock options, and bonuses) guaranteed to company executives if they are terminated due to a merger or takeover.
Good Faith Deposit
Also known as an earnest money deposit, it's a payment showing a buyer's commitment to completing a transaction.
Goodwill
An intangible asset representing the excess of the purchase price over the fair market value of an acquired company's net assets. Goodwill arises when a company acquires another for more than the value of its hard assets.
Greenmail
A strategy where an individual or company acquires enough shares to threaten a takeover, hence forcing the target company to purchase the shares again at a premium to avert the takeover.
Hard Due Diligence
An in-depth and meticulous investigation into the tangible aspects of a company's assets, such as financial statements, contracts, and legal compliance, during an M&A process before finalizing a deal.
Hart-Scott-Rodino Antitrust Improvements Act
US legislation providing the Federal Trade Commission (FTC) and the Department of Justice (DOJ) the ability to review and potentially block large mergers and acquisitions on antitrust grounds before they're finalized.
Hostile Bid
A takeover attempt by a company or individual that's uninvited and not welcomed by the target company's management.
Hostile Takeover
An acquisition in which the company being purchased doesn't want to be acquired, leading the acquiring company to go directly to the shareholders, often by making a tender offer.
Hurdle Rate
A minimum acceptable rate of return on investment that a company expects to achieve before it pursues a project or investment.
Indemnification
A contractual obligation to compensate for incurred harm or loss during a transaction. It often applies in M&A transactions to protect against losses resulting from misrepresentation or warranty breaches.
Intangible Assets
Non-physical assets of a company that may include intellectual property rights, brand reputation, customer lists, and patents, which can be crucial in assessing a company's value.
Integration
The process of combining two or more businesses, where systems, operations, and cultures are streamlined into a cohesive entity. This often follows a merger or acquisition.
Integration Clause
A clause in a legal agreement mentioning that the written contract represents the entire and final agreement between the parties, excluding any prior agreements or understandings.
Integration Planning
The strategic process undertaken by companies before a merger or acquisition to outline how the integration of the two entities will occur, aiming for smooth transition and efficiency.
Integration Timeline
A schedule outlining the specific steps and deadlines involved in merging companies' operations, cultures, and systems after a deal is closed.
Interim Financial Statements
Financial reports that cover a period of less than a full fiscal year, usually quarterly or semi-annually, providing insight into a company's financial position during the year.
Joint and Several Liability
This legal terminology outlines the obligatory responsibility of one or more parties in case of a lawsuit. For example, the victim party may sue one or all the other parties based upon this agreement.
Joint Venture
A commercial enterprise created by two or more parties, typically characterized by shared ownership, returns, risks, and governance.
Legal Opinions
Formal statements written by a lawyer or law firm providing a legal assessment of the situation, often requested in transactions to confirm the legality of the actions taken.
Letter Agreement
A less formal contract that outlines the terms of an agreement between parties. It is used before the execution of a more comprehensive agreement.
Letter of Acknowledgment
A document confirming receipt or recognition of certain facts or the status of a circumstance or transaction.
Letter of Agreement
Often interchangeable with a letter of intent, this document details the preliminary understandings and the intent to enter into a contract without containing all the terms and conditions of the proposed agreement.
Letter of Assurance
A document that provides a pledge or guarantee to give confidence to the other party about specific conditions.
Letter of Awareness
Typically used in financing scenarios, this letter recognizes a particular relationship or situation but does not provide a formal guarantee or assurance.
Letter of Comfort
A written statement issued to assure the intent to fulfill the obligations as recounted in the letter, but typically, it does not carry binding legal weight.
Letter of Credit (LOC)
A document from a bank that guarantees that a seller will receive payment from the buyer based upon the specified terms. If the buyer cannot pay, the bank covers the outstanding amount.
Letter of Indication
A letter from a bank or potential acquirer indicating a willingness to consider financing or an acquisition, often non-binding and preliminary.
Letter of Inquiry
A formal document sent to request more information about a product, service, or business arrangement.
Letter of Intent (LOI)
A non-binding document outlining the preliminary commitments between two or more parties before establishing a definitive agreement.
Letter of Invitation
A letter used to formally invite an individual or business to participate in an event or engage in partnership or collaboration.
Letter of No Objection (LONO)
Issued, typically by a government agency or corporate authority, indicating no objection to the proposed activities or transactions.
Letter of Non-Objection
This is a statement typically from a regulatory body or sometimes another party in a transaction, indicating it does not oppose a particular action or proposal.
Letter of Non-Rejection
It is not a standard term in finance; it may be a letter stating that a particular proposal or application has not been rejected, but this may vary depending on context.
Letter of Subscription (LOS)
This represents a commitment by an investor to participate in an investment, such as purchasing company shares during a funding round.
Letter of Understanding (LOU)
Similar to a Memorandum of Understanding (MOU), it's an agreement between parties outlining terms and details of an understanding, often pre-contractual.
Letter of Understanding and Intent (LOUI)
A combination of an LOU and a letter of intent; it outlines the understanding between parties and their intentions moving forward but is typically non-binding.
Leveraged Buyouts (LBOs)
This occurs when a company is purchased with a significant amount of borrowed money, using the company's assets as collateral.
Lien
This is a legal right or interest a lender has in the borrower's property, granted until the debt obligation is satisfied.
Limited Partner
In a partnership firm, this is an investor who provides capital but has limited liability and is usually not involved in the day-to-day activities/management of the business.
Lock-Up Agreement
An agreement where insiders or major shareholders agree not to sell their shares for a certain period following an IPO to prevent a sudden surplus of stock that could decrease its price.
Management Buyout (MBO)
It occurs when a company's management purchases the assets and operations of the business.
Material Adverse Change (MAC) Clause
A contractual provision allowing a buyer to back out of a deal if a significant negative change occurs in the seller's business.
Materiality Threshold
This benchmark is used to analyze and understand if a seller has misrepresented financial statements to misguide the buyer from factual data. For example, hiding a $1,000 transaction on a company's financial statements may seem insignificant (0.01%), but it is never advisable. However, hiding a $1 million dollar transaction for the same company will be a significant concern (10% error) due to materiality.
Memorandum of Understanding (MOU)
A non-binding agreement between the involved parties outlining the terms and details of an understanding - a precursor to a binding contract.
Merger
The combination of two or more companies into a single entity, usually to enhance competitiveness or expand reach.
Minority Discount
A reduction in the valuation of a minority stake in a business due to that smaller interest's lack of control or marketability.
Minority Interest
An ownership stake in a company that is less than 50% of the company's voting shares and, therefore, does not grant control of the company.
Minority Squeeze-Out
A situation in which majority shareholders pressure the minority shareholders to sell their shares. It is not an uncommon occurrence after a merger or acquisition.
Negative Covenant
Part of a contract or loan agreement that prohibits the borrower from specific actions that could affect the company's stability or creditors' interests.
No-Shop Clause
A clause in a merger and acquisition agreement where the seller agrees not to seek out, negotiate with, or accept offers from other potential buyers for a specific duration.
Non-Binding Offer
An offer made to buy a company or property that does not legally compel the offering party to complete the transaction if accepted.
Non-Compete Agreement
A legal contract where one party agrees not to get involved or start a similar business in competition against the other party.
Non-Disclosure Agreement (NDA)
A legally binding contract establishing a confidential relationship where the involved stakeholders agree not to disclose information as mentioned in the contract.
Offer Price Determination
The process of setting the price a buyer is willing to pay for the purchase of a company.
Operating Agreement
A document that outlines the governance and the financial and functional decisions of a business's operations, typically for an LLC.
Poison Pill
A defense strategy used by a company to prevent or discourage hostile takeover attempts by making its stock less attractive to the acquirer.
Poison Put
A bondholder's right to demand early repayment of the bond's principal from the issuer, typically used as a defense against hostile takeovers.
Positive Covenant
An agreement obliging a seller to undertake certain actions, like maintaining certain financial ratios or regularly providing audited financial statements.
Private Company
A privately owned company, not listed on a public exchange, and not required to disclose as much information as a public company.
Private Equity
It refers to a company's stock that is not listed on a public exchange. It comprises stock(equity) offered for partnerships, specialized investment funds, or mergers and acquisitions.
Private Investment in Public Equity (PIPE)
A type of investment in which private investors buy publicly traded company shares, usually at a discount to the current market value.
Private Placement
Raising funds through the sale of securities to a relatively small number of chosen private investors without a public offering.
Proxy Statements
Documents that a public company must provide to shareholders containing the information required by regulators to be made available before solicitations for votes.
Public Company
A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange or in the over-the-counter market.
Purchase Agreement
A contract where the seller promises to sell something a purchaser promises to buy. It specifies the terms related to selling and purchasing goods or services.
Purchase Price Adjustment
A contractual provision that allows the final purchase price to be adjusted based on certain criteria like working capital and net debt levels at closing.
Put Option
It is a financial contract giving the bearer the right to sell an underlying asset at a set price within a predetermined time frame. However, the owner is not obligated to sell the asset.
Recapitalization
Restructuring a company's debt and equity mixture, often to make a company's capital structure more stable or optimized.
Regulatory Approvals
The official consent from governmental or regulatory bodies required to move forward with certain business transactions, like mergers and acquisitions.
Reps and Warranties
Representations and warranties; statements of fact that one party makes to another as part of a deal. They assert that certain conditions are true or will happen.
Repurchase Option
A clause in an agreement that allows a party to take back some or the entire item previously sold or transferred, often within specified conditions and time frames.
Residual Income
Residual income in corporate finance is the profit remaining after deducting the cost of capital from operating profits. For individuals, it's continuous income after initial efforts have been expended.
Restrictive Covenant
A clause in a contract that places limitations, restrictions, or obligations on a party. For example, non-compete and non-solicitation agreements are typical restrictive covenants in employment contracts.
Revenue Synergies
Gains from a merger or acquisition that can increase revenue beyond what the two companies could generate separately, often due to combined offerings, cross-selling, or improved market reach.
Reverse Breakup Fee
A payment made by the acquirer to the target company if an acquisition fails to close under certain conditions defined in the purchase agreement.
Reverse Merger
A means for private companies to go public, typically by acquiring a publicly traded shell company so that the private company can bypass the lengthier and more complex traditional initial public offering (IPO) process.
Revlon Duties
Legal obligations of a corporation's board of directors to get the best value reasonably available for shareholders in a sale or change of control (takeover).
Rule 144A
A regulation that exempts sales of particular private placement securities to qualified institutional buyers from registration with the U.S. Securities and Exchange Commission (SEC), facilitating transparency and thwarting insider trading.
Seller
The party transferring ownership of assets, shares, or business elements in a transaction.
Share Purchase Agreement (SPA)
A legally binding contract outlining the terms and conditions of the sale and purchase of shares in a company.
Shareholder Agreement
A contract between the shareholders of a company that describes how the company should function, including the rights and responsibilities of the shareholders and their relationship with each other.
Shareholder Approvals
Formal consent by shareholders, often through voting, is required for major decisions like mergers, acquisitions, or changes in the corporate charter.
Shareholder Representative
An individual or entity appointed to act on behalf of shareholders after the sale of a company during post-closing processes, including indemnification claims or purchase price adjustments.
Soft Due Diligence
An informal evaluation often focusing on the cultural and strategic fit between companies, as opposed to "hard" due diligence, which reviews financial statements, contracts, and other tangible assets.
Special Committee
A group of independent directors formed to consider and address matters that involve a potential conflict of interest for the corporation or its senior management.
Spin-off
A type of corporate reorganization where a parent company creates a new independent company by distributing shares of a subsidiary.
Spin-out
Similar to a spin-off, a spin-out occurs when a company "spins out" a business unit into a separate company, often providing initial operating capital and transferring existing staff.
Standstill Agreement
A contract where the bidder in a potential acquisition agrees to limit the purchase of additional shares or not to make additional purchase attempts for a specified period.
Step Transaction Doctrine
A principle in tax law where interrelated steps in a series of transactions are treated as a single transaction to determine the tax implications.
Stock Deal
In acquisitions, a stock deal is where the acquirer uses its own stock as currency to purchase the target company's assets or stock.
Stock Purchase
The act of buying shares in a company, which may relate to transactions from an individual investment to complex corporate acquisitions.
Stock Swap
A transaction where company shares are exchanged for shares of a different company, often in mergers and acquisitions.
Stock-for-Stock Merger
A merger in which the acquiring company uses its own shares to pay for the acquired company's shares.
Strategic Alliance
A mutually beneficial collaboration between businesses that isn't necessarily a merger or acquisition.
Strategic Buyer
A company that buys another company in the same industry to achieve synergies.
Subsidiary
A company controlled by another, known as the parent company.
Supermajority Vote
A requirement that a large percentage of shareholders, typically more than a simple majority, approve essential changes.
Synergy
The idea that the combined value and performance of two companies will be greater than the sum of the separate individual parts.
Tag-Along
Also known as co-sale rights, it allows minority shareholders to sell their shares if majority shareholders are selling theirs, often at the same price and terms.
Takeover Panel
A regulatory group that ensures fair play in takeovers within an orderly framework.
Target Company
The company that is being acquired or is the target subject of a merger.
Tax Gross-Up
A compensation method for making the recipient whole by covering the potential tax liabilities associated with a payment.
Termination Clauses
Provisions in a contract outline the conditions under which the agreement can end.
Valuation
The process of determining the present value of a company or asset.
War Chest
A reserve of funds a company accumulates for strategic future investments or defensive measures against hostile takeovers.
White Knight
A friendly investor or company that rescues a target company from a hostile takeover attempt. The white knight bids appropriately and acquires the target company while being favorable to the board.
Windfall Clause
A contract provision that limits a party from making unexpected profits due to lucky circumstances, often from mergers or acquisitions.
Working Capital Adjustment
An adjustment to the purchase price of a target company, accounting for changes in working capital from a previously agreed-upon baseline.
Conclusion
Concepts such as "strategic alliance," "white knight," and "synergy" may seem like playful terms, but they play an essential part in mergers and acquisition terminology. A thorough understanding of the corresponding terminology is not merely advantageous but a necessary component of understanding mergers and acquisitions.
If you plan to sell or acquire a business, connect with Exitwise advisors to set up your dream team of M&A experts!
