An improvement in per share metrics post-transaction (after issuing additional shares).
The firm that is purchasing a company in an acquisition – the buyer.
A purchasing company acquires more than 50% of the shares of a target company
An add back is an expense used for owner benefit which would not continue after a transaction. This expense is added back to operating profit, increasing EBITDA. Add backs must be non-recurring in nature. They often include an owners’ salary, benefits, or expenses ran through the business but one-time in nature.
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). Learn more about the benefits and challenges with an asset deal.
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.
Buyer Types (Strategic and Financial):
A financial buyer is typically one who buys the business to get a reasonable return on their investment quickly. This buyer is driven by certain rates of financial return and may be looking at a portfolio of companies to buy.
A strategic buyer is looking to grow through buying a business that is strategically aligned with theirs, that fits into their business objectives, product & services set, culture, financials, geography, and other criteria.
Buy Side M&A:
Working with buyers, and finding opportunities for them to acquire other businesses or to grow organically. Learn Buy Side M&A 101 through the Shoot the Moon podcast.
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 businesses.
In order for a merger or acquisition to work, both parties must understand the values and cultural profiles of both organizations.
Debt Issuance Fees:
Underwriting fees charged by investment banks to issue debt in connection with the transaction.
Here the negotiating begins in earnest. All aspects of the definitive agreements, reps and warrants, employee agreements and terms will be negotiated. In this phase, there will be hundreds of items that will be negotiated not only with the buyers but also with their lawyers, accountants and advisors. Without a doubt, this is the most difficult stage of the M&A game.
A worsening of per share metrics post-transaction (after issuing additional shares).
Due Diligence: Upon acceptance of the letter of intent, we set up a virtual deal room as a repository for all documents. A critical confidence builder for the buyer will be the ease with which you can upload all of the documents associated with the business. Learn more about Due Diligence on our podcast.
Earn Out (Deal Structure):
Contingent payments that the seller only receives from the buyer when specific performance targets are met.
Economies of Scale:
Fixed costs decrease because merged companies can eliminate departments with repetitive functions.
Economies of Scope:
A gain of more specialized skills 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.
Agreement and alignment between a buyer and a seller during a transaction. This is advised throughout the process.
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.
Goodwill is an intangible asset held by a business usually associated with the company’s reputation.
Ideal Prospect Profile:
Before outreach to a potential seller, decide what attributes are the most important to you when looking at an ideal company to buy. If you are in a position to sell your business, think about the ideal buyer and what the ideal attributes are. Learn more about building a target list on our podcast.
Merging of companies in the same lines of business. Usually to achieve synergies.
The board of directors and management of the target company do 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 a business using discounted cash flow analysis (often on a per share basis).
Letter of Intent (LOI):
Outlines the terms of a deal and serve as an “agreement to agree” between two parties.
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.
NDA (M&A Focused):
Official documented exchange between a prospective buyer and a seller in the initial stages of an M&A transaction. Learn more.
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.
Rule of 45:
A theoretical growth limit that talks to how do you calculate this in your IT services business. The Rule of 45 is a measurement threshold we use to determine if a company’s growth rate may be at risk for sustainability. We look at two metrics to identify the combined value. First is the Year over Year growth rate as a percentage, and the second is EBITDA percentage.
Our Rule of 45 podcast episode explains this in more detail.
Selling In vs Selling Out:
Selling in is the process in which the owner stays on with the business after it is sold, while selling out is when the owner chooses to exit after the business is sold. Learn more about selling in vs selling out on our podcast.
Sell Side M&A:
Working with the sellers who are trying to find a counter-party for the sale of a client’s business or for organic growth.
A method of testing how sensitive certain outputs in a financial 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 number 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.
Aligning strategy, technology, organization, and people with the needs of the buyer and seller.
Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.
A potential buyer, typically identified by the seller as a viable option. Suitors are pre vetted and have confirmed interest in the transaction.
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.
The valuation of a business is the process of determining the worth of a business, looking at profit and evaluating all aspects of the business. The truest meaningful metric of a valuation is having a willing buyer and a willing seller coming to an agreement on a purchase price.
Merging with companies that are in a company’s supply chain; may be composed of both forward and backward integration.
The latest possible time to make decisions or changes in an acquisition before it is too late. Learn more about examples of the 11th hour in real situations.
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 open 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 offer, 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 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.