What is Market Share?

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Definition: Market share is a firm’s percentage of an industry’s total sales. It is calculated as the product
of the firm’s sales over the industry’s sales during a specified period. In other words, it’s the amount of
sales a company gets compared with its industry as a whole. MS can be divided by industry, product
category, or even specific product. For example, Apple has a huge MS is smartphone industry, but it has
a small MS in the personal computing industry.

What Does Market Share Mean?

What is the definition of market share? The market share indicates how a firm performs relative to its
competitors. Usually, a higher market share implies that a firm realizes higher sales than its competitors
because it successfully expands its customer base. This isn’t always the case though. Sometimes there
are simply barriers to entry in the industry that allows a firm to control a high percentage of the
industry. This often leads to a monopolistic structure.

Companies try to gain sales and beat their competition in many different ways. Some try to increase
their economies of scale (a greater output at a lower average cost) in an effort to provide lower cost
products to consumers while others try to increase brand recognition and consumer loyalty.

Let’s look at an example.

Example

In the fiscal year 2015, the total sales for the pharmaceutical industry reached $1.3 trillion. During the
same period, the revenues of pharmaceutical company X were $47.4 billion.
The market share of pharmaceutical company X is calculated as follows:

Market share = $47.4 billion / $1.3 trillion = 3.6%

Given that pharmaceutical companies face huge research & development (R&D) costs, and it takes a
long time until a drug is approved by the FDA, generating almost $50 billion in sales is a great
achievement.

In order to capture more MS, the pharmaceutical company X decides to market unique products, which
can be offered at different price levels to meet consumer needs. The company also decides to specialize
in the treatment of cardiovascular diseases and will target customers that belong to test groups. By
coming out with more products and appealing to new customers, this strategy will help the firm expand
its customer base and increase its total sales and MS.

Keep in mind that a profitable company does not necessarily have a large market share in the industry.
Profits and MS are not always directly related.

Summary Definition

Define Market Share: Market share is the proportion of total sales for an industry, product category, or
individual product that a single company has

What is Due Diligence?

Professionals define due diligence as an investigation or audit of a potential investment consummated

by a prospective buyer. The objective is to confirm the accuracy of the seller’s information and appraise
its value.

These investigations are typically undertaken by investors and companies considering M&A deals.
Other situations may be buyers and sellers seeking to determine whether the other party has substantial
assets to complete the purchase. It may be a legal obligation or voluntary.

The breadth and magnitude of investigation varies from situation to situation.

due diligence

Generally, the legal terms in a contract or other purchase agreements express specifics of the
transaction. These may include the length of the investigation period, items to be examined, and the
expiration date.

Audit tasks are subject to various situational contingencies. They typically include auditing financial
records, evaluating assets and liabilities, and assessing operations or business practices.

Due diligence undertaken in mergers and acquisitions is vigorous, time consuming, and complex.

Incomplete or improper investigation is actually one of the major culprits of M&A failure.

Therefore, it is critical for firms to closely investigate potential investments and understand the
business’ true value. A firm may otherwise waste a great deal of their valuable assets and time
completing the transaction.

Reasonable Diligence Definition

Reasonable diligence refers to the notion that no two situations or transactions are identical and should
be treated accordingly.

For example, in M&A no two firms have the same capital, assets, liabilities, practices, or risk. Therefore,
items that would be considered reasonable to painstakingly examine for one firm may not be applicable
to another.
M&A podcasts

Due Diligence Meaning in English

The term refers to the measure or exercise of care enacted by a prudent, rational individual or entity
under given circumstances.

Initial uses of the phrase date back to the mid-1500s. The meaning of due diligence here refers to
“requisite effort.”

Since then, it has grown from everyday use to encapsulate legal, business, and investment connotations.

What is Contingent Due Diligence?

Contingent investigation represents one of the several protections to a buyer when undertaking a new
investment or initiating a contract.

‍ ontingent due diligence means that a company or buyer has shown and confirmed interest in the
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seller.

However, the final details of the deal and decision on moving forward are contingent on the buyer’s
findings from investigation. This means that a company or individual may withdraw if they are not
satisfied with their findings.

Examples are often found in real estate. In this circumstance, the due diligence period is where the
buyer conducts site visits and property inspections. Items such as the closing price and whether the deal
will close depend on their conclusions from the assessment.

What is Due Diligence in Law?

The stock market crash of 1929 catalyzed the utilization of these investigations as a legal obligation. The
due diligence legal definition (or law definition) was legally formulated with the enactment of the
Securities Act of 1933. This was to induce transparency in financial markets.
As a result, security brokers and dealers became liable for fully releasing data and information
concerning the instruments they were selling. They are now obligated to audit companies before
auctioning their securities to assure that their instruments are healthy.

Ultimately, this is to protect and reduce the risk of parties participating in the offerings.

Underwriters conduct an

Audit of investments prior to auctions to confirm they are sound

Validating that all information disclosed in offering documents are true and of material fact

Obtaining appropriate legal opinions and assistance

Further investigating red flags

Ensure there are no contractual agreements that may hamper the transaction

What is Due Diligence in Business?

The due diligence business definition refers to organizations practicing prudence by carefully assessing
associated costs and risks prior to completing transactions.

Examples include purchasing new property or equipment, implementing new business information
systems, or integrating with another firm. Business audits often help surface and avert potential issues
in the future.

Organizations exercise due diligence by:

Researching customer reviews and the seller’s reputation

Considering the environmental impact of the due diligence transaction

Supplementing purchases with insurances or warranties

Evaluating price in comparison to competitors

What is Financial Due Diligence?

Financial audit refers to an in-depth analysis of another company’s financial records. Firms undertake
financial investigation prior to entering an agreement with another entity.

This ultimately helps appraise its value and calculate potential risks. Common circumstances that require
financial investigation include initiating a substantial investment, merging, or acquiring a firm.

Many people ask, what are the due diligence documents that should be collected? Materials and
documents analyzed during the financial due diligence are:

Revenue, profit, and growth trends

Stock history and options

Short and long-term debts

Valuation multiples and ratios in comparison to competitors and industry benchmarks

Balance sheets, income statements, and the statement of cash flows

financial dd playbook

What Happens when Due Diligence Expires?

Often times, the Letter of Intent (LOI) includes a Due Diligence Clause. This often defines the conduct
and rights during the investigation, the parties involved, and what happens after commercial due
diligence.

However, the exhaustive and intensive nature of an audit may cause issues for firms. Some cannot
assemble all pertinent information while abiding by a definitive deadline.

If this happens, the buyer can only use the information uncovered during investigation to decide
whether to close the deal.
In some cases, if the buyer feels that their investigation was inadequate, they may request an extension
from the seller. Extensions may or may not be granted. In turn, this could even frustrate the seller.

The biggest takeaway here is that efficiency, productivity, and effectiveness are critical.

Areas of Due Diligence

Due diligence is typically undertaken in business due to two main types of transactions. This includes the
sale or purchase of goods and services or when merging with or acquiring another corporate entity.

Within each transaction, it is generally conducted in a number of areas.

The goal of investigation in general transactions is to substantiate whether the purchase is a sound
decision. Items examined may include:

Warranties

Inventories

Customer reviews of the seller

Enhanced due diligence in mergers and acquisitions is considerably more extensive. It audits areas such
as:

Financial records

Business plans and practices accretive

The target company’s customer base earnout

Products or services in their pipeline

Human resources statistics

Sustainability and environmental impact

One high-vitality area that many businesses fail to accomplish in its entirety or even at all is a self-
assessment. In a self-assessment, organizations ask themselves what their corporate needs are and
what they hope to glean from the transaction.

When executed properly, a self-assessment will commence integration down the right path.

Types of Due Diligence

Audits should be all-encompassing, which makes it difficult to even know where to begin or what to look
at. Detailed are 8 types of investigations that should be undertaken to ensure comprehensive coverage
of risks and pressure points.

types of due diligence

Financial — Financial due diligence is one of the most critical and renowned forms. In financial audit,
firms investigate the accuracy of the financial records in the Confidentiality Information Memorandum
(CIM). The target is gaining an understanding of overall financial performance and stability and detecting
any other underlying issues. Items audited may include:

Financial statements

The company’s forecasts and projections

Inventory schedules.

Legal — Legal due diligence helps determine whether the target company is legally subservient or
embroiled in issues. Items assessed include:

Contracts

Corporate documents

Board meeting minutes

Compliance doctrine
Human Resources — Human Resources (HR) due diligence focuses on the company’s most vital asset:
their employees. HR investigation aims to understand:

The company's organizational structure

Compensation and benefits

Vacancies

Union contracts (if applicable)

Any types of harassment disputes or wrongful terminations

Operational — Operational due diligence involves an examination of all the elements of a company’s
operations. The objective is to evaluate the condition of technology, assets, and facilities and unearth
any hidden risks or liabilities.

Environmental — Environmental due diligence verifies that the company’s processes, equipment, and
facilities are in compliance with environmental regulations. The purpose is to negate the possibility of
penalties down the line. These may span from small fines to more severe penalties such as plant
closures.

Business — Business due diligence identifies who the company’s customers are and pinpoints its
industry. It helps forecast the impact and associated risks that the transaction may pose on the acquiring
firm’s current customers.

Strategic Fit — Strategic fit due diligence assesses whether the target company will be suitable with
respect to their goals and objectives. This requires the buyer to assess:

Potential synergies

Benefits of the transaction

How well the two entities would merge together

Self-Assessment — Self-assessment due diligence is often overlooked by firms. However, it is one of the
most important. It should be enacted at the onset of merely considering an investment or integration.
It is an inward-looking approach were firms collectively ask themselves, “what do we want or need from
this transaction?” Essentially, a self-assessment is like writing a grocery list before heading to the store.

Utilize Due Diligence Templates/Checklists

DealRoom's Playbooks help team efficiently manage due diligence from the start. Diligence incorporates
many moving parts and it is critical to a deal's success.

Our library of pre-built ready to use playbooks enables teams to thoroughly and effectively collect
necessary diligence information.

What Does Earnout Mean?

An earnout is a financing arrangement for the purchase of a business in which the seller finances a
portion of the purchase price, and payment of this amount is contingent on achieving a predetermined
level of future earnings. An earnout is often used to bridge a valuation gap. The seller only gets paid if
the predetermined level of future EBITDA or other financial targets are achieved.

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Divestopedia Explains Earnout

Say a seller has a valuation expectation of $15 million, but the buyer thinks a purchase price of $12
million is more appropriate. The gap of $3 million might be bridged by an earnout. The seller could get
paid $1 million per year only if a certain EBITDA target is achieved in each of the next three years
following the sale.

Intuitive

An earn out can be negotiated, as it is simply another contractual term of the deal. That being said, an
earn out will typically range between 10% to 50% of the total purchase price, and will usually not extend
past three years.
Takeover.

Earn outs can be negative for sellers if they are not properly defined at the letter of intent stage and/or
properly managed throughout the earnout period. While they can produce a higher total purchase price,
they are often used by sophisticated buyers to put the risk of future performance back on the seller.
They are particularly challenging to measure if the acquired company will be integrated with the buyer's
operations during the earnout period. Integration makes it harder to define whether the additional
EBITDA was contributed by the acquired company, or as a result of synergies from working within the
buyer's overall operations.

What is a Poison Pill?

The term poison pill refers to a defensive technique used by a target firm to avoid or deter an acquiring
business from taking the risk of a hostile takeover. Prospective targets use this strategy to make the
potential acquirer appear less appealing to them. Although not always the first and best way to protect
a company, poison pills are usually very successful.

How Poison Pills Work?

Throughout the corporate world, takeovers are relatively popular where one corporation attempts to
take ownership of another. More giant corporations prefer to take on smaller ones because they want
to reach a new market, when both firms combine competitive advantages, or when the acquirer wishes
to reduce the rivalry. However, takeovers aren't always harmonious and become aggressive when the
target isn't enjoying or willing to be taken over.

When a company is the object of a hostile takeover, it may use the tactic of poison pills to make itself
less appealing to the prospective acquirer. As the name suggests, a poison pill is similar to something
hard to take or accept. A company targeting an unwanted takeover may use a poison pill to disfavour
the acquiring company or individual's shares.

Special Considerations

The poison pill strategy has been used since the 1980s and was developed by Wachtell, Lipton, Rosen,
and Katz, a New York-based law firm. The name derives from the poison pill spies brought in the past to
prevent being challenged in the event their enemies captured them.
It was designed as a way of preventing an acquiring company from buying a majority share in the
potential target or negotiating directly with shareholders at a time when takeovers were becoming very
common and frequent.

Poison Pill: Meaning, Pros & Cons, Types, Examples, and More

Poison Pill: Meaning

Poison Pill is a defensive mechanism technique prevalent in the corporate world to thwart a hostile
takeover. It is a strategy used by the Target Company to avoid the hostile takeovers completely or at
least slow down the acquiring process. The main purpose of the target company by deploying this
technique is to make sure the acquisition becomes costly enough and unattractive for the acquiring
company or raider.

Under this strategy, the ‘Rights Issue’ mechanism is successfully used to defend against the hostile
takeover. The target company allows the existing shareholders to buy extra shares of the company at a
substantially discounted rate. As a result, the overall percentage stake to be acquired or already
acquired by the raider decreases significantly.

Table of Contents

Poison Pill: Meaning

Understanding the term: Poison Pill

Advantages of the Poison Pill

Disadvantages of the Poison Pill

Types of Poison Pills

Flip-in Poison Pills

Example

Flip-Over Poison Pills

Preferred Stock Option and Employee Stock Options (ESOPs)

Voting Rights
Golden Parachute or Staggered Board

High Leverage

Real-life Examples of Poison Pills

Poison Put Vs Poison Pill

Conclusion

The formal name of the Poison Pill is the ‘Shareholder Rights Plan’. The shareholders have voting rights
on approval and disapproval of acquisition. This right acts as a poison pill against hostile takeovers by
making the target company less attractive. Although the Board of Directors has a complete authority to
pull back or modify these rights at any time. This clause helps the top-level management of the company
to directly negotiate with the acquiring company.

When the implementation of a Poison Pill strategy takes place at a high pitch or in an extreme manner,
then it is known as a Suicidal Pill.

Understanding the term: Poison Pill

The literal meaning of the term goes back to the time of wars and spying. At that time, spies would stay
with the enemies for getting all information. If they are expected to get caught, they would swallow such
a poisonous pill and die rather than bowing down.

The same scenario is applicable to the business world. Under this strategy in order to discourage the
hostile takeover, the target company makes itself unattractive and costly enough for the raider. It puts a
lot of obstacles in between and makes sure, it becomes very difficult to acquire. The term Poison Pill is
used in this context, where the target company swallows the pill of obstacles and defense and avoids
getting caught in the hostile takeover. It is a Poison Pill because it works as a poison against the raider
making it difficult to continue the acquisition process. Thus they are pills that are difficult to swallow by
the acquiring company. The company continues to defend by putting guns on the shoulder of
shareholders of the company.
The term was first used in the business world in 1980 and since then it has been a very popular defense
mechanism against hostile takeovers.

Advantages of the Poison Pill

It saves the company against hostile takeovers and keeps the control and management the same.

The interest of Minority Shareholders remains safe.

It opens doors for better acquiring prospects in the future. As it is not always the case that the target
company does not want to get acquired ever. It can prefer a harmonious takeover over a hostile
takeover with a better value for existing stakeholders.

Poison Pills allow the shareholders (actual owners of the company) to make decisions with regard to the
timing, value, and strength of acquisition.

This strategy, even if not successful in avoiding hostile takeovers fully, at least helps the acquisition
process to slow down and forces the acquirer to negotiate the terms. Thus, brings him to the
negotiation table.

These advantages are non-exhaustive in nature.

Disadvantages of the Poison Pill

As the purchasing of additional shares takes place at a discount rate, the value of the company falls
down by impacting the shareholder’s value adversely.

This aggressive strategy discourages Intuitional investors like Foreign Direct Investors (FDIs) and Foreign
Portfolio Investors (FPIs) from further investing in the company.

Sometimes, this strategy encourages non-productive managers to continue to work and halt the growth
and expansion of the company.

If the target company is not efficiently using the resources, this strategy halts the change and efficient
usage of resources by the acquiring company.

If the Acquiring Company is very tough, this strategy might not influence its decision and would rather
negatively impact the target company only.

These disadvantages are non-exhaustive in nature.

Types of Poison Pills

Following are the types of Poison Pills strategies useful as a defense:-

Flip-in Poison Pills

This is a basic and common type of poison pill and is in the company’s charter and official documents as
a provision. Under this strategy, the target company allows existing shareholders (except the acquiring
company) to purchase additional shares at a discounted price. As a result of this, the value of the already
purchased shares by the acquiring company falls to a record low. The price which the company is paying
for a stake becomes much higher than the current value of the same; as a result, it becomes very
expensive for the acquiring company. Activation of the Flip-in provision takes place after the acquiring
company has purchased enough hostile stake (above a particular threshold limit) and before completing
the final acquisition process. Moreover, the issue of additional shares also reduces/ dilutes the overall
percentage stake of the acquirer in the total capital.

Once the activation of the provision takes place, it does not allow the raider to buy additional shares.
And as result, the more buying and selling of additional shares takes place, the more it dilutes the stake.

Example

For example, the threshold limit of XYZ Company is 20% stake. Let’s say ABC Company is successful in
acquiring in 20%, and so in this situation, activation of Flip-in Provision takes place. After the activation,
it does not allow ABC Company to further purchase any shares. XYZ Company gives additional shares to
existing shareholders at a discount. This dilutes the 20% ownership stake of ABC Company and makes it
an expensive acquisition deal. Here the ABC Company has two choices; it can back out and drop the
acquisition deal or can pursue the acquisition by negotiating the terms. And the last step, which may be
quite costly, is to acquire further stake to make up to the 20% threshold at exorbitant prices from
existing shareholders.

Flip-Over Poison Pills

Under this strategy, the shareholders get the right to purchase shares of the acquiring company at a
discount rate, post-acquisition. As a result of these provisions, the acquiring company losses its stakes
and value after the merger deal is over. Ultimately the purpose of Flip-In and Flip-Over is the same, but
they work in an opposite direction. They both work by issuing discounted shares, diluting the ownership
stake of the acquiring company, and makes the take over expensive.

Flip-In and Flip-Over are the most popular Poison Pill strategies. Other strategies are as follows:-

Poison Pills

Preferred Stock Option and Employee Stock Options (ESOPs)

This is the third strategy, where the equity shareholders of the company get a Preference Shares stock
option. The equity shareholders can exercise such an option, only when an outsider is trying to acquire.
As a result this stock option suddenly makes the target company unattractive.

In a similar manner, Employee Stock Options (ESOPs) are also issued which can only be exercised in
hostile takeovers. At this stage, it might be possible that the talented employees of the organization
might leave the organization. This will reduce the talented workforce in the organization.

Voting Rights

This strategy goes hand-in-hand with Preference Stock Options and Flip-in Provisions. It gives special
voting rights to Preference Shareholders after the acquirer has crossed the threshold limit of ownership
stake. Again this makes Target Company unattractive.

Golden Parachute or Staggered Board

Golden Parachute is a compensation given to the top executives because of their termination due to the
Mergers and Acquisition. As a result, this increases the acquisition cost and acts as a poison pill.

Similarly, the Staggered Board is where the directors are divided into various divisions and serve for
different time lengths. This is a time-consuming affair and takes years for the acquirer to get full control.
And so, this strategy also acts like a Poison Pill.

All these three elements are useful against hostile takeovers and act as a poison pill.
High Leverage

In order to avoid hostile takeovers, the target company starts acquiring a lot of debt in the company. A
lot of loans and advances create a negative impact on the acquiring company.

Real-life Examples of Poison Pills

History is full of real-life examples of Poison Pills, some of them are as follows:-

PapaJohn’s Pizza in 2018, adopted the Poison Pill’s strategy against an investor who had a 30% stake in
the company.

In 2012, Netflix had also adopted the Poison Pill strategy after an investor had acquired a 10% stake in
the company.

In 2016, Pier 1 Imports has adopted a Poison Pill as a defense against Alden Global Capital LLC, which
had a 9.5% stake in the company.

There are many other real-life examples as well.

Poison Put Vs Poison Pill

Under Poison Put, the target company issues bonds which can be fully redeemed with the full
investment value before the maturity date. The top executives of the company issues bonds with poison
put element as a defense against a hostile takeover. The main purpose of this strategy is to make the
acquisition costlier for the acquiring company, by asking them to pay to bondholders of the company.

Poison Put and Pill, both are defense techniques. The only difference is that Pill impacts shareholders of
the company, share price, and shares value, while Put does not impact equity at all.

Conclusion

Irrespective of the limitations of Poison Pills, it is one of the most sought after and practiced defense
mechanisms. It allows the target company to deal in a better way with the acquiring company. It gives a
chance to the target company to negotiate terms and come up with a fruitful deal for both the entities,
the acquirer and the target