Mergers & Acquisitions: Glossary of Terms

Acquirer: The buyer, the person or entity that is purchasing the assets and/or equity in a company.

Acquisition: The purchase of the controlling interest or ownership of the equity and/or assets of another company.

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 deal: The acquirer purchases only certain, defined assets of the target company (not its shares or equity).

Bottom line: The net income “line” of the income statement.

Business cycle: A recurring pattern of expansion and contraction in the economy of a given industry or sector. In most industries or sector, the average cycle is three to four years.

Capitalization: Term used to describe a company’s permanent capital, long-term debt and equity.

Capital structure: The composition of the invested capital of a business enterprise; the mix of debt and equity financing.

Cash consideration: The portion of the purchase price paid to the target company in the form of cash.

Cash flow: Cash that is generated over a period of time by an asset, group of assets or business enterprise. It may be used in a general sense to encompass various levels of specifically defined cash flows.

Covenants: Provisions in the legal agreements on loans, bonds, or lines of credit. Usually written by the lender to protect its position as a creditor of the borrowers.

Deal structure: Typical deal structure may include stock, assets, seller debt, earn outs or other valuables besides cash. The complex nature and potential varying forms of deal structure is an important reason why middle-market professionals like investment bankers, brokers, business tax professionals and M&A attorneys are often hired.

Discontinued operations: Operations that have been or will be discontinued by the company. These items are reported separately on the income statement.

Divestiture: The sale, for cash or for securities, of a segment of a company to a third party which is an outsider.

Drag-along rights: Rights that enable a shareholder/equity holder or group of shareholders/equity holders (usually those who own a controlling interest in the company) to compel other shareholders/equity holders to sell their stock/equity in the event a purchaser desires to purchase more than what the controlling shareholder(s)equity holder(s) own(s).

Due diligence: In the process of an acquisition, the acquiring entity is often allowed to see the target entity’s internal books, operations and internal procedures. The acquiring entity reviews all areas of the target to satisfy their interests. Offers are made contingent upon the resolution of the due diligence process.

Earn out: An arrangement in which sellers of a business may receive additional future payments of the purchase price if certain performance metrics are met.

EBITDA: Earnings before interest, taxes, depreciation and amortization.

Exclusivity (“no-shop”) requirement: A contractual requirement that prevents a company from soliciting or negotiating other deals for asset or stock purchase for a specified period of time, while it is exclusively negotiating with a potential buyer.

Golden parachute: An employment contract that guarantees extensive benefits to the executive if the executives are made to leave the company.

Goodwill: The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).

Identifiable assets: An asset that can be assigned a fair value and can include both tangible and intangible assets.

Intangibles: All intangible assets like goodwill, patents, trademarks, unamortized debt discounts and deferred charges.

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

Letter of intent (LOI): Letter agreement, with both binding and non-binding elements, signed by both buyer and seller which contains major commercial or business terms and provisions of a contemplated deal.

Liquidation value: The amount which is available if the assets of the business are sold off and converted to cash.

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

Multiple: The inverse of the capitalization rate; common measure of value to compare pricing trends on deals.

Net book value of assets: Book value of assets minus book value of liabilities.

Net cash/Net debt deal: Purchase price assumes that seller retains all balance sheet cash and pays all third-party/interest-bearing debt. When the term is used, it should be supplemented by a specific definition.

Net debt: Cash asset less company debt.

Normalized earnings: Economic benefits adjusted for nonrecurring, noneconomic, or other unusual items to eliminate anomalies and/or facilitate comparisons.

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

Pari passu: A Latin term referring to the equal treatment of two or more parties in an agreement. For example, an investor may want to have a certain right that is pari passu with investors in a previous financing round.

Post-money valuation: The value of a company after investors invests in each round of financing.

Pre-money valuation: The value of a company before investors invests in each round of financing, or value based on transaction value without consideration of capital structure.

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

Purchase price allocation: The breakdown of the total purchase price between net identifiable assets and goodwill (used for tax purposes and must be agreed upon by buyer and seller).

Recapitalization: Restructuring a company’s debt and equity mixture, most often with the aim of making a company’s capital structure more stable; a partial sale of a company which allows a seller a liquidity event plus a retention of partial ownership of stock, generally by a private equity investor.

Restructuring charges: Any fees or charges related to early debt repayments that are part of a restructuring.

Sandbagging: Target company playing along with the less desirable bid and stalling for time while waiting for a better offer to appear or finalize.

Share/Stock deal: The acquirer purchases all the shares or all the equity for the target (and assumes all assets and liabilities).

Stock consideration: The portion of the purchase price given to the target in the form of shares of the acquirer’s stock.

Tag-along rights: These rights enable the holder to participate in a sale of stock from another shareholder to a third party, typically in proportion to the number of shares the holder holds in the company. Co-sale rights are usually designed and intended to protect the holder if a founder or a majority shareholder decides to sell his, her or its interest in the company. The co-sale rights holder can participate in the sale, usually with the same terms and conditions as the founder or majority shareholder.

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

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

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

Vertical integration: Merging with companies that are in its supply chain. It is composed of both forward and backward integration.

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.

338(h)(10) election: IRS election to treat a stock sale as an asset sale for tax purposes only.