Industry Definitions

Accretion

An improvement in per share metrics post-transaction (after issuing additional shares).

Acquirer

The firm which is purchasing a company (the buyer).

Acquisition Adjustment

The difference between the price an acquiring company pays to purchase a target company and the net original cost of the target utility company's assets. An acquisition adjustment is the premium paid for acquiring a company more than its tangible assets or book value.

Adjusted EBITDA

Adjusted EBITDA differs from EBITDA in that adjusted EBITDA normalizes income and expenses since different companies may treat each type of income and expense differently

Amalgamation/Consolidation

The joining of one or more companies into a complete new entity.

Asset Deal

The acquirer purchases only the assets of the target company (not the shares).

Bootstrap Effect

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.

Carve-Out

Partial divestiture of a business unit in which a parent company sells minority interest of a child company to outside investors. A company undertaking a carve-out is not selling a business unit outright but, instead, is selling an equity stake in that business or spinning the business off on its own while retaining an equity stake.

Cash Consideration

The portion of the purchase price given to the target in cash form.

Confidential Information Memorandum (CIM)

A description of the business including its history, products, markets, management, facilities, competition, financial statements, product literature, and a review of its key investment considerations and growth potential. This document is used to market a business to potential buyers.

Debt Issuance Fees

Underwriting fees charged by investment banks to issue debt in connection with the transaction.

Dilution

A worsening of per share metrics post-transaction (after issuing additional shares).

Discounted Cash Flow (DCF) Valuation

A method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flows are estimated and discounted by using cost of capital to give their present values

Due Diligence

An investigation into the risks and opportunities of an investment. Its aim is to give the potential buyer an insight into the target, so that he can minimize potential negative effects of the acquisition. The overall due diligence work consist of very distinct sub-processes such as a (a) financial, (b) legal, (c) commercial, (d) operational, (e) environmental, (f) organisational, (g) integration, (h) insurance and (i) pension due diligence.

Earn-out

a provision written into some financial transactions whereby the seller of a business will receive additional payments based on the future performance of the business sold.

EBITDA

Earnings before interest, taxes, depreciation and amortization.

Economies of Scale

Fixed costs decrease because merged companies can eliminate departments with repetitive functions or gain operational efficiencies.

Economies of Scope

A gain of more specialized skill or technology due to a merger.

Enterprise Value

The economic measure reflecting the market value of a business. It is a sum of claims by all claimants: creditors and shareholders.

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).

Exclusivity

An agreement between advisor and client guaranteeing an exclusive relationship between both  parties.

Expression of Interest (EOI)

Letter from buyer to seller indicating general value and terms a buyer is willing to pay for a company. The letter is non-binding on both parties.

Forward Integration

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

The difference between the price paid for the target and its book value.

Hostile Takeover

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.

Identifiable Assets

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

Investment Bank

A financial services company or corporate division that engages in advisory-based financial transactions on behalf of individuals, corporations, and governments

Letter of Intent (LOI)

A letter signed by the target and potential acquirer, stating the intent to pursue a mutual agreement. The letter binds both parties to exclusivity and secrecy.

Leveraged Buyout

This is the acquisition of a company using significant amounts of debt to increase returns on investment.

Net Book Value of Assets

Book value of assets minus book value of liabilities.

Non Disclosure Agreement (NDA)

An agreement where two interested parties pledge to retain secrecy around the information they come into contact with. Signatories to NDA's are potential acquirers, consultants, internal management.

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 retention of partial ownership of stock, generally by a private equity investor.

Synergies

Cost savings and revenue enhancements that are expected to be achieved in connection with a merger/acquisition.

Target

The firm that is being acquired (the seller).

Vendor Note

A short-term loan a vendor makes to a customer that is secured by goods the customer buys from the vendor.

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.

Working Capital

The capital of a business which is used in its day-to-day trading operations, calculated as the current assets minus the current liabilities.

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