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M and A Jargon Demystified PDF
M and A Jargon Demystified PDF
demystified
kpmg.com/be/mandajargon
LOI?
Alpha? Grace?
The AMandA
dictionary
CoCo?
MBI?
M&A jargon demystified
Glossary of more than 150 commonly
used terms in company mergers and
acquisitions
Dépôt légal: D/2014/2664/551
ISBN: 978-90-46-57214-6
BP/KPMGMAL-BI14001
Disclaimer
Nothing in this publication, even in part, may be published, reproduced, translated or
adapted in any form whatsoever, including photocopying, microfilming, recording or
disk, or included in a computerized data bank without the previous express permission
of the editor.
The information provided in this document is general in nature and does not cover a
particular person or entity. While we strive to provide you accurate and punctual infor-
mation, it is impossible to guarantee the accuracy at the time of receipt or in the future.
It is also not recommended for you to follow this information without the advice of a
professional who specializes in this area and has taken care of thoroughly analyze your
particular case.
We would like to draw your attention to the fact that the views and opinions expressed
herein are those of the author and do not reflect those of the KPMG network in Bel-
gium. The information provided in this document is general in nature and does not refer
to the specific situation of a person or entity.
The author or publisher cannot be held responsible for any damage suffered by the
reader as a result of imperfections in this book.
Foreword
Among professionals who are active in the world of M&A (Mergers & Acquisitions,
a term that is used for a transaction in which a company is acquired or is merged
with another company), the use of jargon is well established, so well in fact that at
times no one else can understand what they are saying.
This book aims to create clarity in the tangle of technical terms. It is aimed at
everyone who is interested in mergers and acquisitions or who would like to
master M&A jargon. It puts simplicity first, so do not expect any «scientific» or
legal explanations of the terms, but rather a didactic interpretation, based on our
own experience and that of our colleagues from the KPMG network who work
in M&A. After reading this book, you will perhaps possess a more thorough
knowledge of mergers and acquisitions, but we do not recommend using these
practical explanations in negotiations and contracts, or otherwise allowing them to
have any effect on the transaction. This is to avoid misunderstandings.
The book is structured by grouping content-related terms into chapters and, where
possible, has also been presented in a logical sequence. Where we use new
technical terms in an explanation, we explain them in a subsequent section. You
therefore do not need to browse through the entire book to gain an understanding.
If you wish to look up a term quickly, please refer to the alphabetical index at the
back of the book.
In this second, fully revised edition of this book, we have added a number of new
terms, most of which are related to capital markets («the stock exchange») and
updated a number of terms.
This book was made possible through the efforts of many people. In particular:
Yann Dekeyser, Stijn Potargent,Wouter Caers, Jorn De Neve, Koen Fierens, Luc
Heynderickx, Peter Lauwers, Wouter Lauwers and Rosy Rymen.
Additional comments and suggestions are always welcome, and can be sent to
info@kpmg.be.
KPMG Advisory
Forward 1
1. Agreements 5
1.1 Agreements in General 6
1.2 Guarantee provisions in the agreemen 8
2. Deal structuring 13
3. Price 19
4. Transaction process viewed from the perspective of the buyer 27
5. Transaction process viewed from the perspective of the seller 33
6. Advisors 37
7. Valuation 41
8. Buy-out 47
8.1 Perspective of the fund 48
8.2 Debt financing 52
9. Growth capital 57
Index 71
> Offer Letter: a letter indicating the intention to purchase, which is often of a non-
binding character ( see also «Non-binding/binding»).
> Exclusivity: a clause in a letter or an agreement in which the seller states that
it is not negotiating with any other parties and will not begin or enter into any
such negotiations. Exclusivity is for a limited
time period.
> MAC / Material Adverse Change: the lack of any fundamental change of
circumstances (MAC) affecting the company is a very common condition for
converting an LOI into a binding SPA. In practice, the proper definition of the
MAC is often part of the discussions. Often, reference is made to maintaining
profitability, not losing important customers, maintaining licenses, and similar
matters.
> SPA / Share Purchase Agreement: an SPA is the final agreement between
the buyer and the seller on the sale of the company, subject to a number of CPs
(condition precedents).
> Representations: statements. In the event that statements made by the seller
about the company prove to be incorrect, these statements, either together with
the warranties or otherwise, form the basis for subsequent indemnities.
> Warranties: guarantees or general safeguards. The seller not only provides
statements, but also guarantees that these statements are correct. The
warranties may be time-limited and limited up to a certain amount of money.
> Disclosures: notifications. This is a list of elements that the seller discloses
to the buyer with the aim of avoiding subsequent disagreement as to whether
certain information has or has not been divulged during the negotiations. It is
important in this context to properly record whether these disclosures have an
effect on the warranties or indemnities. If, for example, the seller discloses that
soil has been polluted, this might prevent the buyer from making a claim for the
pollution.
> Threshold: frequently, parties agree only to submit claims if the total amount
of the claims exceeds a specific minimum amount. Two systems can then be
linked to this, specifically the basket and the threshold sum. Of course, hybrid
systems may also be agreed on.
> Basket: basket. Once the threshold has been reached, the loss will be
compensated in full.
Legal
ce
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an
Fin
In the case of the acquisition of a group of businesses and companies, it is
important to properly assess the order in which companies or assets are
acquired by existing companies or newly created companies. This analysis,
which is called deal structuring, seeks to combine tax optimization with a
healthy financial structure and legal simplicity and clarity.
> Asset deal: an agreement in which the assets, not the shares of a company
are sold. This has three special consequences. First, most of the debts, including
the majority of hidden debts, remain
behind in the selling company.
Second, this agreement undergoes
a different tax treatment ( see
also tax treatment). Third, there
There are major differences
are consequences for the legal
between an asset deal and a
continuity of the activities of the
share deal when it comes to
company.
taxation.
> Share deal: an agreement under
which the shares of the company are sold ( see also asset deal).
> Tax treatment: usually, gains on shares are not taxable and the sale of shares
(a share deal) may be preferred by the seller. On the other hand, the buyer may
prefer an asset deal for tax purposes because the goodwill paid ( see chapter
on Valuation - Goodwill) may be tax-deductible, which, in principle, is not the case
with a share deal.
> Legal continuity: this term refers to the question whether the company’s
existing contracts with customers, suppliers, staff, and authorities (including
licenses), etc., are to be retained after the acquisition. In a share deal, the shares
of the company are sold, which only rarely has an effect on the agreements
> Debt pushdown: an exercise in which the acquisition debt is pushed ‘«own»
to the operating companies. Banks and other lenders prefer to provide funding to
companies that generate the operating cash flow, particularly if the acquisition of
shares is done through a holding company that has no operating activities itself.
This is often the case in private equity deals.
> Financial assistance: this term refers to Section 629 of the Belgian Company
Code, which states: “A public limited company cannot advance any funds, nor
permit loans or provide security with a view to the acquiring of its shares or
profit-sharing certificates by third parties….” This ban was lifted as of 1 January
2009, and «financial aid» or «financial assistance» is now possible under certain
conditions.
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In view of the fact that a company is not only a complex body of activities,
but also of assets and debts, various types of arrangements are agreed on
to fix the price. This chapter contains a number of common terms that are
used in discussions about pricing.
A simple example
We will take as our example a taxi company with five taxis. On the
basis of a debt-free situation and half-full fuel tanks, you determine
how much you want to pay for the taxis and the customer base. At
the time of acquisition (the date of the closing accounts) you take an
inventory. You notice that there are some car loans that need to be
repaid, the fuel tanks are empty and there are still envelopes in the
taxis containing cash for buying fuel. The final price will ultimately
amount to the price payable for the business activity, minus the loan
and the fuel shortage in the tanks, plus the cash found in the taxis.
> Debt & cash free: the price assuming a situation without financial debts and
without cash free.
> Working capital: the sum of the customers, suppliers, inventories and other
current assets and liabilities necessary for the day-to-day operation of the
company.
> Normalized working capital: an analysis of how the working capital would
look in normal circumstances. This involves adjusting for all exceptional and
non-recurring items, such as the collapse of a major customer, a major supplier
position due to the purchase of a machine, or a large inventory position due to a
machine breakdown.
> Closing accounts: when the agreement is recorded in an SPA, a future date
on which a balance sheet is to be drawn up (the closing accounts) is agreed.
These closing accounts will then form the basis for determining the net debt and
the working capital that will be used for determining the final price according to
the agreed price formula.
> Net debt: there is no official definition of net debt, which means it is important
to define it properly in the LOI and SPA. The net debt generally comprises
financial liabilities (in a broad sense) minus cash. Financial liabilities include the
following: loans and associated liabilities (including interest that is current but
not yet payable), bills of exchange, repayable subsidies, pensions and other long-
term commitments to staff, commissions giving rise to cash outflows within
the foreseeable future, off-balance sheet commitments that can be considered
equivalent to debt, and certain leasing debts.
> Earn-out: if there is a major price discussion between the buyer and seller
due to differing views on the future results of the company, an earn-out may
> Spread payment / vendor note / vendor loan: if the seller allows spread
payments, it implicitly grants a loan (vendor note or vendor loan) to the buyer.
> Locked box: a locked box mechanism is a price mechanism in which the price
of the shares is determined on the basis of a historical accounting situation,
rather than a future situation (closing accounts). The price is determined as a
Example
In the example of the taxi company (see page 20) the fuel payments
made using the cash in the envelopes will reduce the cash but will
also increase the contents of the fuel tanks, and thus have a neutral
effect on the value of the company.
debt and cash free price, minus historical debt, plus cash, and adjusted for the
working capital surplus or shortfall at that same historical time. In addition, it is
contractually agreed that there cannot be any cash flowing out of the company
(the locked box) in the form of the payment of dividends or management fees.
All other cash movements remain within the company and are thus assumed to
have no effect on value. This method can only be applied if the buyer can obtain
a very good picture of the balance sheet of the company during the acquisition
process.
No closing
accounts
Period covered by the
Ownership and control
historical financial statements
Dec 2013 Jan 2014 Feb Mar Apr May Jun Jul
In a locked box system, the period between the last available balance sheet and the
closing date is not covered by closing accounts but a contractual agreement that no
capital can flow out of the company.
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Viewed from the perspective of the buyer, the sales process involves,
among other things, the buyer wanting to form a good picture of the
company it is buying, in the area of both risks and opportunities. This
investigation, which is often called auditing the books, or due diligence,
includes many elements that each form a separate element of the due
diligence process. We summarize the most common elements below.
> Financial due diligence: the review of the historical and future figures of
the company. The focus in this context is often on the quality of earnings (how
robust are the historical results?), the quality of net debt (which items could all
be taken into consideration in determining the net financial debt? – see also
debt and cash free–, the forecast (analysis of the budgets and future projections)
and the normalized working capital.
> Tax due diligence: the investigation of the historical and future tax situation
and exposure of the company or companies in the areas of both direct and
indirect taxes.
> Legal due diligence: the review of the legal situation of the company in the
areas of company law, review of contracts, labor laws, intellectual property (IP),
permits, etc.
> Commercial due diligence: the review of the markets in which the company
operates and the commercial position in which the company finds itself.
> Pensions due diligence: the review of the existing and future obligations
related to pensions. The future commitments can vary based on the type of
pension plan set up by the company.
final amount will be. However, for the members, the law protects the return on
accrued reserves by imposing a minimum return.
> Defined benefit pension plan: a pension plan in which the final amount to be
obtained is contractually fixed. In an acquisition with this type of pension plan
there is often discussion about the size of the existing pension debt. Specialized
pension actuaries are therefore consulted to analyze these types of plans and to
work out how the pension provision and the accrued specific investments relate
to the pension debt.
> Insurance due diligence: the investigation into the existing insurance
coverage and variance analysis with the required coverage, as well as the
investigation into the continuity of insurance coverage during the transaction
process.
> Operations and synergy due diligence: the investigation into the efficiency
of the operations and how specific synergies can be achieved.
> Hold harmless letter / approved reader letter: letter of indemnity. A letter in
which an adviser provides a party with access to a report or a file, in which this
party agrees to indemnify the advisor from any liability that could arise from the
access provided to files or reports.
> Clean team: a clean team exists when an advisor is asked by both the selling
and the buying parties to review a very specific topic that contains sensitive
information, such as the customer portfolio. The clean team receives all the
information, but only provides a summarized analysis to its clients (the buyer and
the seller together). The parties could agree that, for example, the sale will not
proceed if one of the top five customers disappears. If the seller would rather
not disclose the identity of the customer, a ‘clean team’ scenario could offer a
way out, since the clean team can analyze the customers and report on them on
an anonymous basis.
> Data room: the room or space (may also be an electronic space, see also
E-data room) in which specific data concerning the company are collected. By
providing the buyer (and its advisors) with access to this space, the buyer will
have the opportunity to read these documents and to form a picture of the
company. Visits to a data room are governed by data room rules.
> Data room rules: a set of rules that the visitor must first accept, laying down
whether the visitor is to be given access to the data room, at what time, for how
long, and what may happen to the information contained in it (e.g. whether or
not copies can be made).
> Long list: the initial long list of potential buyers for the company.
> Short list: the short list of companies that will be contacted in an initial phase
to gauge their interest. The short list is often created after making a selection
from the long list.
> Teaser / blind profile: the anonymous profile of the company that is sent to
potential buyers. The aim is to determine whether such a purchase could interest
them without the identity of the company being disclosed.
> Process letter: the process letter contains information on how the seller
wants to organize the sales process, by which date a bid is expected and what
requirements it must meet and how the next phase will look after that bid.
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In a transaction, various advisors provide guidance to their clients and
provide a number of services. We can identify the following classic roles
and fees.
> Deal advisor: the advisor (often an investment bank or corporate finance
house), actingas a broker, which means that it looks for the parties and brings
them together, conducts and organizes negotiations and draws up the various
non-judicial sales documents (see also teaser, info memo and process letter).
> Lawyer / M&A lawyer: the specialized lawyers or corporate lawyers who
write the contracts and negotiate ( see also Chapter 1: Agreements).
> Specialist advisors: subject specialists are called upon during transactions to
provide specific advice on the environment, pensions, taxes, etc.
> Auditor: an auditor is often asked to issue a report on the closing accounts
( see page 21).
> List of parties: a list of parties is drawn up in order to obtain a clear overview
of the advisors and members of the management of the buying and selling
parties. The list records the contact details of the various people involved in the
transaction.
> Success fee: the portion of the fee that depends on the closing of the
transaction.
> Retainer fee: the fixed or monthly payment that is awarded regardless of
whether the transaction is completed.
> Time and expense based fee: fee based on hours worked and reimbursement
of expenses incurred.
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Many specific techniques and methodologies are used to determine
the value of a company. These are described very extensively in the
professional literature. It is not our aim here to give a description of the
methodology as well, although some frequently used terms are described.
> Goodwill: the difference between the price paid for the shares and the book
value of the equity of the company.
> EBITDA / Earnings Before Interest, Tax, Depreciation and Amortization: the
profit before interest, taxes, depreciation and amortization. This is a gauge of the
operating cash flow of a company.
> Free Cash Flow: deducting the tax on the operating profit, investments and
growth in working capital from the EBITDA provides an indication of the free
cash flow.
> PBT / Profit Before Tax: the profit before taxes, sometimes also described as
EBT/earnings before tax.
> EBIT / Earnings Before Interest and Tax: the profit before interest and taxes.
This is also called operating profit or operating profit before tax.
> NOPAT / Normalized Operating Profit After Tax: the normalized operating
profit after taxes. This is the operating profit after taxes, which is normalized by
eliminating all extraordinary and non-recurring items.
> DCF(F) / Discounted Cash Flow (to the Firm): a commonly used valuation
method based on an actualization of future free cash flows. The future free cash
flows are estimated on the basis of a forecast and then actualized to the current
date by using an actualization rate or discount factor known as the WACC.
> WACC / Weighted Average Cost of Capital: the weighted average cost of
capital. The WACC is calculated by taking the weighted average of the cost
of the capital and the cost of the debt (cost of equity and cost of debt). The
weighting factor is the ratio of financing from the company’s own funds (capital)
to financing from borrowed funds (loans - debt).
> Cost of debt: the cost of financing debt after deduction of the tax benefit
owing to the tax deductibility of interest amounts.
> CoE / Cost of Equity: the cost of capital, determined by equating it to the
required return that average investors want to achieve on their investments, on
the basis of the company’s risk profile. A classic way to determine the CoE is by
applying the CAPM.
> CAPM / Capital Asset Pricing Model: the model for approximating the CoE,
which is based on the assumption that an investor will require a return that is at
least equal to the return on a risk-free investment, plus an adjusted premium to
compensate for the risk that investments are made in equity and a premium for
other specific risks associated with the investment. The formula is as follows:
CoE = RF + Beta x MRP + Alpha
> MRP / Market Risk Premium: market risk premium. A premium that an
investor requires on top of the risk-free rate as compensation for the fact the
investment is in shares. It is generally assumed that this premium amounts to
approximately 5%.
> Beta (levered/unlevered): the beta is the adjustment factor that we apply to
the MRP. The beta adjusts the MRP for two risk factors. The first is for the sector
in which the company operates, because, for example, a biotech company is not
comparable to a real estate company in terms of risk profile. The second is for
the debt level of the company, because it is assumed that a company with more
debts runs more risks than a company with less debts. The beta that contains
the adjustment factor for the debt level is called the levered beta, whereas the
beta not containing this adjustment factor is the unlevered beta.
> Alpha: the risk premium that is added to the CoE because of specific risks
associated with the company. The most common example of this is the small
firm premium. This is a risk premium that is added because a small company is
subject to more risks than a large company.
> Multiple: the multiple method or market method is a valuation method that
is often used to support the results of a DCF(F) method. In this method, the
company is compared with other companies whose value is known. This is
done using a multiple. Sector peers, for example, are valued at 6 times EBITDA.
> EV / Enterprise Value: this is the debt and cash free value of a company. Both
the DCF(F) method and many multiples initially result in an EV, which must be
adjusted for the cash and debts. Only then is it possible to arrive at a value of the
shares.
> Discount / Premium: adjustments are still applied to the value of shares if the
transaction relates to a minority interest, a majority interest, a holding company
through which ownership is acquired indirectly, or shares without voting rights,
etc.
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Given the sharp growth in the activity of investment funds, it essential to
have a separate chapter on the sometimes very specific use of language in
the investment fund world. For clarity, we have made a distinction between
the terms associated with funds and the capital side of the investment and
the terms associated with debt financing.
> Business Angels: investors who invest in a company at a very early stage. This
type of investor is often an individual or a small group of individuals.
> Venture Capital: this term is used for all investment funds. However, to
make a clear distinction between investment funds active in start-ups or
technologically uncertain companies and investment funds active in mature cash
flow generating companies, the term venture capital is being used to indicate the
first type of investment funds to an increasing extent. Buy-out funds and private
equity relate to the second type of investment funds.
> Hedge funds: funds that, unlike PE funds, also invest in assets other than
shares.
> Vulture funds: funds that are specialized in acquiring distressed companies.
> Turn-around funds: see also vulture fund or special situations fund. This
name places the emphasis on the value created by restructuring the acquired
companies and making them profitable again (i.e. turning them around)
> Sweet Equity: to encourage management and bring its interests into line with
those of the investment fund, management is given the opportunity to invest
in the target company under special conditions. In this context, the relative
contribution per share is often lower for management than the amount paid by
the investment fund. The ratio of the effective price paid by management to the
price paid by the investment fund for their respective investments is sometimes
also called the ‘envy ratio’.
> Investment horizon: the period for which the fund intends to invest. There are
two types of funds in terms of horizon: open-end and closed-end.
> Closed-end fund: a fund with a limited investment horizon. Often, a few years
will be allocated for investing: several years for the growth of the company, and
several years for its sale. Closed-end funds seek to complete this entire cycle in
6-12 years.
> Hurdle: the return that a fund must realize for its investors before the
management of the investment fund can share in the added value of the fund.
> Committed capital: the total amount that investors commit to the fund in
order for it to make investments during a specific period.
> Drawdown: once a fund has decided to proceed with an investment, the
investors are called upon to make the necessary money available. The drawdown
refers to the actual provision of money already been promised to the fund
(committed capital).
> Distribution: the payment of the returns achieved by the fund to the investors.
> Exit: when a fund steps down as an investor, this is referred to as exiting. At
the time of its investment in a company, the PE fund already considers how it
could sell back its shares in the company.
> Secondary buy-out: if one PE fund sells its investment to another PE fund,
this is known as a secondary buy-out.
> Club deals: an agreement in which various funds pool money with a view to
an investment that would not be possible on an individual basis because of the
amount involved or specific investment restrictions.
> Acquisition finance: a specific term used for the debt financing of the
acquisition of a company.
> Stapled / debt package: a package of loans in various forms and with different
degrees of subordination, ranging from mezzanine to junior and senior debt.
> Junior debt and senior debt: a subordinated loan that is lower (junior)
or higher (senior) in priority, where the subordination refers to the order of
repayment in the event of the company’s bankruptcy.
> PIK / Payment in Kind: fixed-income securities that generate interest in the
form of additional debt instead of a sum of money. The final interest is only
payable on the final maturity date.
> Bulletloan: a form of debt in which the interest payment and the debt
redemption take place in full at the end of the loan.
> Grace period: the period during which no interest payments and/or debt
repayments need to take place.
> Debt syndication: if several banks underwrite the debt financing, they can
form a syndicate and as a result act jointly.
> Headroom: this term is sometimes used to refer to the difference between
the current performance of the company and the covenants.
> Breach: if a covenant is not met and therefore a breach of covenant occurs, the
loan agreements may stipulate that the debt is immediately due and payable or
repayable.
> Euribor / Euro Interbank Offered Rate: This is a reference interest rate often
used as the basis for a variable interest rate.
> Basis points: hundredths of one percent of interest. The interest on a loan is
often expressed as EURIBOR plus a number of basis points.
> Hedging of interest risk: derivative financial instruments, such as interest rate
swaps, are used to convert a variable interest rate into a fixed interest rate.
> FFF: Family, Friends and Fools. Financing form for young start-ups by means
of loans (subordinated or otherwise) from friends, acquaintances, or family
members.mille.
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If an investor increases the capital in a company in order to support growth
and in return receives a portion of the shares, this is called growth capital.
This situation can occur at companies at various stages of maturity, ranging
from start-ups to companies that are preparing for a subsequent stage in
their growth.
> Pre-money value: the value of the company excluding the value of the cash
paid when the capital is increased.
> Post-money value: the value of the company including the value of the cash
paid when the capital is increased. This value usually serves as a reference for
allocating shares.
An example
Where the pre-money value is 100 and the capital increase is 50, the
post-money value is 100+50 = 150.
This post-money value is usually used as a reference for the calcu-
lation of the share ratio. In that case, the subscriber to the capital
increase specifically has the right to 50/150 or 33% of the shares.
> Board seat: providers of growth capital often demand the right to be
represented in the board of management. The number of board seats is then
included in the negotiations on the terms of the capital increase, as are the
majorities required for taking certain decisions.
> Anti-dilution: a clause in the financing contract that offers a certain protection
to a new financier. This clause states that if the reference value for determining
the number of shares issued in exchange for the capital increase would be lower
in a subsequent round of capital funding than in the current round of capital
funding, the existing financiers will receive additional shares to prevent dilution
(see also ratchet).
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In addition to the technical aspects of the deal, it is important to keep an
eye on what happens after the acquisition. This section therefore includes
a number of terms that require an active approach if you want to do
something about the morning-after feeling.
> Strategy: when initiating and implementing a deal, the underlying strategic
goal should always be borne in mind.
> PMI / Post Merger Integration: the proper integration of the acquired
company into the existing buying company has to be set up, planned and
monitored. One of the tools often used for this purpose is the 100 day plan.
> 100 day plan: a detailed plan that specifies what must happen during
the first 100 days following the acquisition. It is generally assumed that the
foundation for a successful integration must be laid in 100 days.
> Synergy: the term used to describe the value created by the merger of
two companies. This value can be found both on the cost side (e.g. cheaper
purchases thanks to combined purchasing power and cheaper administration due
to not doubling up on financial management) and on the revenue side (e.g. by
selling the products of one company to the customers of the other company).
> Announcement: an important part of the 100 day plan is the announcement
of the acquisition. This includes notifying the press as well as communicating
the consequences and the changes that this will entail to stakeholders (staff,
customers, suppliers, etc.).
> Closing dinner: the traditional dinner at which the deal teams of the buyer,
seller, their advisors and financiers meet several weeks or months after the
transaction is completed.
> Fat lady: during negotiations there are frequent warnings about premature
optimism about the success of the transaction. “It isn’t over until the fat lady
sings” refers to the fact that the transaction is not complete until the final
agreement is signed.
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The term «capital markets» is often used to refer to everything involved in
trading shares, bonds and other long-term investments. In this context, the
financial markets («the stock exchange») are the means by which supply
and demand in various types of financial products are brought together.
> Bonds: bond loan: a marketable debt instrument for a loan entered into by
a government, a company or an institution as a source of financing. The buyer
of the bond receives an interest payment from the bond issuer in return for
furnishing the loan.
> Dilution: a decrease in the earnings per share due to an increase in the
number of shares over which the profit is distributed.
> Free float: the percentage of a company’s shares that is freely tradable on the
stock exchange.
> Broker: a term for a stockbroker who buys and sells shares on a stock
exchange on behalf of clients.
> Greenshoe (of over-allotment option): option reserved for the selling
shareholders to increase the number of shares offered in an IPO by a fixed
amount in the event of oversubscription.
> Market cap: the market capitalization of a listed company, i.e. the total value
of its shares, calculated on the basis of the price of the shares on the exchange,
multiplied by the number of outstanding shares.
> Poison pill: a hostile takeover can be made more difficult by granting
additional rights to certain existing shareholders. These rights can mean that a
capital increase is reserved for friendly parties by certain existing shareholders.
> Hostile take-over: a hostile bid. A bid for a listed company whose current
board of management is against the takeover.
> Underwriter: usually an investment bank that manages and underwrites the
public issue of shares or bonds. As part of this, the bank promises to buy any
shares that are not placed on the stock exchange.
> Prospectus: a document required by law when issuing financial products (e.g.
shares, bonds, investment funds, etc.) which sets out the terms and conditions
of the issue.
> FSMA / Financial Services and Markets Authority: The FSMA, the successor
to the former Belgian Banking, Finance and Insurance Commission [Commissie
voor het Bank-, financie-en Assuratiewezen], is responsible for the supervision
of the financial markets and listed companies in Belgium, the approval and
supervision of certain categories of financial institutions, the monitoring of
compliance with rules of conduct by financial brokers and those marketing
investment products for the general public and the so-called social supervision of
supplementary pensions.
> Insider trading: prohibited trading with insider knowledge. This is the buying
or selling of shares by persons with access to information about the listed
company that is not publicly known.
> In the money: an option is ‘in the money’ if the price of the underlying
security on the stock exchange is higher than the strike price in the case of a
call option (‘right to buy’), or if the price of the underlying security on the stock
exchange is lower than the strike price in the case of a put option (‘right to sell’).
> MTN / Medium Term Note: This is comparable to a bond, but usually offers
a higher return than normal bonds and/or has a shorter maturity. Trading takes
place on the OTC (‘»Over The Counter») market.
> Naked: a naked, or uncovered, call option gives the purchaser the right to buy
shares that are not yet in the possession of the writer.
> Penny stocks: a name for shares with a very low absolute price on the stock
exchange.
> Warrant: a warrant gives the holder the right, but not the obligation, to
subscribe to a capital increase at a predetermined price on or before a specific
date. This is a commonly used alternative to options in employee ownership
schemes, because the company does not need to possess any of its own shares
since new shares will be created when the warrant is exercised.
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© 2014 Kratos Law, a Belgian civ. CVBA/SCRL civ. All rights reserved.