INTRODUCTION
It can be intimidating to enter a challenging field like Mergers and Acquisitions (“M&A”) world. Even for professionals, how long one has been in the field is irrelevant- the moment one joins a new team or tackles a new project, one is likely to hear new jargon and acronyms. There are several terms in an M&A that can become tricky for you if you are not aware of them at the onset. Therefore, it is important to understand such terms.
This article discusses important M&A terms which you should be aware of while entering the M&A world.
THE GLOSSARY
- Above the line cost & revenue: The elements of cost and revenue that go into calculating EBITDA (check meaning below).
- Account earnings: According to proper accounting standards, account earnings refer to the amount of money earned by a company during a particular time, usually a quarter or year. In evaluating a company’s accounting earnings, investors must consider not only earnings quantity but also earnings quality. In determining earnings quality, you consider whether the earnings are repeatable, manageable, and bankable.
- Accounting policies: These policies are the specific procedures performed by the company to prepare its financial statements.
- Accretive: Acquisitions are deemed to be accretive when the combined earnings per share of the acquired/combined businesses are greater than the seller’s standalone earnings per share. Generally, accretion is when there is improvement or earnings and asset growth that occur due to business expansion.
- Acquiree / Target: An acquiree or a target company is a company that is being acquired or taken over by the acquirer during an acquisition or a merger.
- Acquirer / Offeror: An acquirer company is a company that is undertaking to buy the target company or is making a bid for such a company during an acquisition or a merger.
- Acquisition: It is the act of buying a controlling stake in the target company to take control of it. An acquirer company may acquire the target company as part of its growth strategy since it is more beneficial to take over an existing firm’s operations and market niche than to expand on its own. The acquisition price is usually paid in cash, in stock of the acquiring company, or a combination thereof.
- Acquisition of assets: The acquirer company may purchase all or some of the assets of the target company through an Asset Purchase Agreement.
- Adjusted book value: A company’s adjusted book value reflects its true fair market value after assets and liabilities are adjusted.
- Amalgamation: As a result of amalgamation, two or more businesses come together to form a new organization. An amalgamation is different from a merger as no amalgamating company survives as an independent legal entity. Under the Companies Act, 2013, the scheme of amalgamation is explained in accordance with Section 230-232 of the Act.
- Asset deal: In this type of acquisition, the acquirer does not buy the target’s shares, but rather cherry-picks certain assets.
- Backward integration: It is a process where the acquirer acquires a target that produces raw materials as per the needs of the acquirer. In this way, a steady stream of reasonably priced, high-quality raw materials will be available without interruption.
- Business cycle: The business cycle describes the process of expansion and contraction which takes place frequently in an economy.
- Bootstrap effect: In the Bootstrap Effect, a merger of the acquirer company and the target company causes a temporary boost in earnings for the acquirer company even though there is no economic benefit from such combination.
- Buy-out: The term buyout refers to a transaction in which the ownership equity or majority of the stock of a company (target) is acquired. As a result, the acquirer “buys out” the shareholders of the target company.
- Business valuation: It refers to the process of evaluating a company in terms of its economic value.
- Cash consideration: A portion of the purchase price/acquisition price is given in the form of cash to the target company by the acquirer.
- Carve-Out: A carve-out or an equity carve-out is a form of corporate reorganization where a parent company creates a whole new company and instead of issuing shares, issues an IPO of its existing company. This is done primarily to raise cash. For example, in 2009, Las Vegas Sands did a carve-out of their Sands China and as a result, they were able to raise $3 billion.
- Circular merger: A circular merger is a type of traditional merger where an acquirer acquires the target company in the same or related industries.
- Conglomerate merger: A merger between two companies in different or unrelated industries.
- Commercial due diligence: An acquirer performs commercial due diligence on the target where the acquirer analyses the target customer’s segment, markets status, operation, sales channel, etc.
- Competitive bid: A competitive bid refers to a competing offer for the target company which can be made by any person/company other than the primary acquirer.
- Covenants: Covenant(s) refer to the provisions in any agreement drafted during the acquisition and are based on loans, bonds, or lines of credit.
- Crown Jewel: The target company can use the ‘crown jewel’ strategy as a hostile defence mechanism, but the practice in India is not so flexible. Under this strategy, the company cans sell its highest profitable asset or assets or undertakings to which the acquirer was attractive.
- Dilution: Dilution refers to a situation when there is a rapid reduction in the percentage of a company’s stock due to the introduction of new shares into the market.
- Data room: Data rooms hold data related to the company being sold either in a physical room or in an electronic space.
- Deal structure: In M&A, a deal structure is a binding agreement between parties outlining the rights and responsibilities of both parties. The deal structure is simply the terms and conditions that govern a merger or acquisition.
- Demerger: A demerger is a corporate reorganization in which a business is broken down, either to function on its own or to be sold or liquidated. It is a separation of one or more units to form a new company.
- Due Diligence: Through due diligence, the acquirer can verify relevant information about the target such as contracts, finances, and customer information. This information gives the acquirer a better sense of certainty and helps it to make an informed decision.
- EBITDA: Earnings before interests, taxes, depreciation, and amortization provide a snapshot of the short-term operational efficiency of a company.
- Economies of scale: When a company increases its level of output, it experiences a cost advantage. It reflects a situation when there is a decrease in the operating cost of the company which is accomplished by increasing the production.
- Employee Stock Ownership Plan (ESOP): ESOPs provide employees of the company with certain ownership in the company.
- Friendly Takeover: It is a takeover that is usually accepted by the board of directors and management of the target company and the shareholders will advise the company to accept the offer of the acquirer.
- Forward integration: In the forward integration acquisition, the target company uses or retails goods that are produced/manufactured by the acquirer.
- Golden Parachute: It refers to a ‘separation’ clause of an employment contract. The top or senior executives of the target company are given a contractual guarantee of a large sum of compensation whose services will be terminated in case the hostile takeover succeeds. This strategy is used to ensure the management has put in efforts to build the company in the event of a hostile takeover.
- Greenmail: It refers to a situation where an unfriendly company holds a significant block of shares, forcing the target company to repurchase the shares at a substantial premium to prevent a hostile takeover.
- Grey Knight: It refers to a situation where the target company asks its friendly party to take over the company to prevent the hostile takeover from the primary acquirer.
- Hostile Takeover: Any takeover which is not recommended, supported, or agreed to by the management of a target company is a hostile takeover.
- Horizontal merger: A merger between the two entities in the same or related industry.
- Holding Company: Section 2(46) of the Companies Act, 2013 defines a holding company as a ‘holding company in relation to one or more other companies, means a company of which such companies are subsidiary companies.
- Insider trading: The practice of insider trading involves trading the stock or other securities of a publicly traded company based on material, nonpublic information about that company. In India, the current regulation is SEBI (Prohibition of Insider Trading) Regulations, 2015.
- Joint Venture A joint venture is an agreement between two or more companies to create a business where each of the companies contributes and participates in equal parts.
- Letter of intent: The letter of intent is a document that binds the acquirer and the target to exclusivity and secrecy. It is signed by both parties with the intent to pursue a mutual agreement.
- Merger: When two or more companies combine, the new entity is born. The target ceases to exist.
- Net asset value: Value of a company’s assets minus its liabilities.
- Offer price: Price offered by the acquirer to acquire the target.
- Poison Pill: The target company issues the securities with special rights which shall be exercisable at the option of a certain triggering event. The shareholders of the company are given special rights to purchase additional stock at a large discount to the stock market’s price on that specific triggering event, thus making the company expenses for the acquirer.
- Reconstruction: During reconstruction, a company restructures its debts substantially to mitigate financial harm and improve operations.
- Share deal: The acquirer company purchases all the shares of the target company via the Shareholders’ Agreement.
- Synergies: They are the benefits that are anticipated as a result of a merger or an acquisition, including but not limited to, cost savings or revenue enhancements.
- Takeover: This term is similar to acquisition but differs from a merger.
- Tender offer: Without taking consent from the acquiree, the acquirer makes a tender offer directly to shareholders of the target company to sell their shares.
- Vertical merger: A vertical merger is the combination of two companies that operate at different stages of the production process in the same industry.
Note: This list does not claim to be exhaustive. Keep reading and researching to keep yourself updated!
YLCC would like to thank Nikunj Arora for his valuable inputs in this article.
