M&A Glossary

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Last Updated:December 4, 2023

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M&A Glossary and Terms

Mergers and acquisitions (M&A) is a general term for consolidating companies or assets through various financial transactions.

M&A can be classified into three main types based on the relationship between the companies or assets involved:

1. Horizontal merger: A type of merger where two companies that operate in the same industry and at the same stage of the production process combine to form a new entity.

This type of merger is often pursued to achieve economies of scale, eliminate competition, or expand into new markets.

2. Vertical merger: A type of merger where a company combines with a supplier or customer. This type of merger is often pursued to improve efficiencies, reduce costs, or gain access to new technologies or markets.

3. Conglomerate merger: A merger where two companies with unrelated businesses combine to form a new entity. This type of merger is often pursued to diversify the company's portfolio, gain access to new markets, or increase its market power.

Each type of merger has its advantages and disadvantages, and the decision to pursue a particular type will depend on the specific circumstances and objectives of the companies involved.

M&A Glossary - General Terms

This glossary includes some common terms used in the context of M&A:

Acquisition: The process of purchasing one company from another company or individual.
Conglomerate merger: A merger where two companies with unrelated businesses combine to form a new entity.
Consolidation: Combining several companies or assets into a single entity.
Friendly takeover: An acquisition approved by the target company's board of directors and usually supported by the target company's shareholders.
Hostile takeover: An acquisition that is not approved by the target company's board of directors and is typically carried out against the wishes of the target company's management.
Merger: The process of combining two companies into a single entity.
Reverse merger: A privately held company acquires a publicly traded company and takes on the publicly traded company's name and stock.
Spin-off: A type of merger where a parent company splits off a subsidiary and creates a new, independent company.
Due diligence: Thoroughly investigating a company or asset before a merger or acquisition to assess its value and potential risks.
Earnout: A merger or acquisition consideration where the acquirer pays the target company additional compensation based on the company's future performance.

Leveraged buyout (LBO): A type of acquisition where the acquirer uses borrowed money to finance the purchase of the target company.
Premium: The amount by which the price paid in a merger or acquisition exceeds the market value of the target company.
Proxy contest: A situation where shareholders of a target company attempt to replace the company's board of directors with their own nominees to influence the outcome of a potential acquisition.
Recapitalization: The process of restructuring a company's capital structure, often through a merger or acquisition.
Tender offer: An offer made by an acquirer to purchase a specific number of shares in a target company at a specified price.
Valuation: The process of determining a company's or asset's worth is often an important factor in deciding to pursue a merger or acquisition.

M&A Glossary - Hostile Takeover Terms

In Mergers and acquisitions, a hostile takeover is a type of corporate acquisition in which the acquiring company attempts to gain control of the target company without the support of the target company's board of directors. A few of these hostile takeover terms are

White knight: A friendly acquirer who comes to the rescue of a target company in a hostile takeover.
Poison pill: A strategy in which the target company issues a large number of new shares, diluting the ownership stake of the acquiring company and making the acquisition more expensive.
Shark repellent: This provision in the target company's bylaws or charter makes it more difficult for the acquiring company to gain control. For example, the provision might require a supermajority vote of the target company's shareholders to approve the acquisition.
Greenmail: Tactic where the target company agrees to buy back its shares at a premium price from the acquiring company, effectively paying the acquiring company to go away.
Pac-Man defense: The target company turns the tables and launches its hostile takeover attempt against the acquiring company.
Golden parachute: A provision in an executive's employment contract that provides them with certain benefits (such as a large cash payment) if their company is acquired and their employment is terminated.

M&A Glossary - Complex Terms

Mergers & Acquisitions is a broad field. There are specific and complex terms we need to keep in mind:

Breakup fee: A fee paid by the target company to the acquirer if the merger or acquisition is not completed for certain reasons.
Drag-along right: A merger or acquisition agreement provision that allows a majority shareholder to require the minority shareholders to sell their shares to the acquirer.
Economic value added (EVA): A measure of a company's financial performance that considers the cost of capital and the value of its assets.
Material adverse change (MAC) clause: A merger or acquisition agreement provision allows either party to terminate the agreement if a significant, negative change occurs with the target company before the deal is completed.
Voting trust: A trust created to hold shares of a target company on behalf of the acquirer, which allows the acquirer to control the target company's voting rights during the merger or acquisition process.

It is important for anyone involved in the process to understand these terms and their implications thoroughly.

M&A Glossary - Financing Terms

Mergers and acquisitions often require significant financing. There are several terms related to financing M&A transactions:

Debt financing: The use of borrowed money to finance a merger or acquisition. This can include loans from banks, bonds issued by the acquiring company, or other forms of debt.
Equity financing: The use of the acquiring company's own stock or the issuance of new stock to finance a merger or acquisition.
Leveraged buyout (LBO): A type of acquisition where the acquirer uses borrowed money to finance the purchase of the target company.
Mezzanine financing: A type of financing that is more risky and expensive than traditional debt financing but less risky and expensive than equity financing. Mezzanine financing typically takes the form of subordinated debt or preferred stock.
Synergy: The potential increase in value that can result from combining two companies or assets. This can be a key factor in the decision to pursue a merger or acquisition, as the combined value of the two companies may be greater than the sum of their individual values.

M&A Glossary - Negotiation process

The negotiation process in Mergers & Acquisitions also includes a variety of terms that are important for all parties involved.

1. Letter of intent (LOI)

A non-binding document that outlines the key terms and conditions of a potential merger or acquisition.

The LOI is typically used as a starting point for the negotiation process and serves as a basis for the more detailed acquisition agreement.

2. Material adverse change (MAC) clause

A provision in a merger or acquisition agreement allows either party to terminate the agreement if a significant, negative change occurs with the target company before the deal is completed.

This clause protects the acquirer from unexpected developments that could significantly decrease the target company's value.

3. Reverse breakup fee

A fee paid by the acquirer to the target company if the merger or acquisition is not completed due to certain specified reasons (such as the acquirer's failure to obtain regulatory approval).

This fee is intended to compensate the target company for the costs and expenses incurred with the failed transaction.

Overall, mergers and acquisitions can be complex and involve many considerations, terms, and concepts. Understanding these concepts is important for executives, lawyers, investment bankers, and financial advisors involved in the M&A process.