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M&A Glossary
Definitions of all things M&A related

Written by Tim Vipond

M&A Glossary and Terms


Welcome to CFI’s M&A Glossary of terms and definitions for mergers &
acquisitions transactions.

These terms are taken from CFI’s advanced financial modeling course on
mergers and acquisitions modeling.

Help

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General M&A Terms


Accretion

An improvement in per share metrics post-transaction (after issuing


additional shares).

Acquirer

The firm that is purchasing a company in an acquisition – the buyer.

Acquisition

The purchasing company acquires more than 50% of the shares of the
acquired company and both companies survive.

Amalgamation/Consolidation

The joining of one or more companies into a new entity. None of the
combining companies remains; a completely new legal entity is formed.

Asset Deal

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

Backward Integration

A company acquires a target that produces the raw material or the


ancillaries which are used by the acquirer. It intends to ensure an
uninterrupted supply of high-quality raw materials at a fair price.

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.

Cash Consideration

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

Compensation Manipulation

One of the poor reasons to make a merger. Management compensation


is according to company performance benchmarked to other companies,

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so an increase in the size of the company often means an increase in


salary for management.

Conglomerate

A merger of companies with seemingly unrelated businesses.

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).

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.

Empire Building

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.

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Friendly Takeover

The board of directors and management of the target company approve


of the takeover. They will advise the shareholders to accept the offer.

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 excess purchase price over and above the target’s net identifiable
assets (after fair value adjustments).

Horizontal Integration

Merging of companies in the same lines of business. Usually to achieve


synergies.

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.

Intrinsic Value

The estimated value of a business using discounted cash flow analysis


(often on a per share basis).

Merger/Statutory

The purchasing company acquires all of the target company


shares/assets; the target company ceases to exist (acquirer survives).

Net Book Value of Assets

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Book value of assets minus book value of liabilities.

Offer Price

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.

Restructuring Charges

Any fees or charges related to early debt repayments that are part of a
restructuring.

Revenue Enhancements

Increases in revenue that are expected due to cross-selling, up-selling,


pricing changes, etc.

Sensitivity Analysis

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.

Share/Stock Deal

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The acquirer purchases all the shares of the target (and assumes all
assets and liabilities).

Stock Consideration

The portion of the purchase price given to the target in the form of
shares of the acquirer’s stock.

Subsidiary

Acquirer completely takes over the target but preserves the target’s
brand for the sake of brand reputation or customer base.

Synergies

Cost savings and revenue enhancements that are expected to be


achieved in connection with a merger/acquisition.

Takeover Premium

The percentage above the target’s current share price (or VWAP) the
offer price represents.

Target

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.

Vertical Integration

Merging with companies that are in a company’s supply chain; may be


composed of both forward and backward integration.

VWAP

Volume Weighted Average Price, often used in reference to the takeover


premium (e.g., 15% above the 20-Day VWAP).

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M&A Glossary – Takeover Strategies


Black Knight

An unwelcome takeover bidder.

Creeping Takeover

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.

Dawn Raid

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.

Godfather Offer

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.

Tender Offer

Acquirer offers an attractive price to target shareholders to sell their


shares in the case of a clean takeover bid.

Toehold Position

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.

M&A Glossary – Hostile Takeover Defenses


Crown Jewels Defense

Target selling the most valuable parts of the company (crown jewels) if a
hostile takeover occurs. This deters acquirers from pursuing the hostile
takeover.

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Dead-hand Provision

The provision requires that anti-takeover defenses can only be canceled


by a vote of the board, so acquirers who want to avoid the consequences
of the defenses must receive approval from the board before initiating a
takeover.

Flip-in

Target company’s shareholders can purchase more shares of its stock at


a discount. This dilutes the stock, making it more expensive and difficult
for a potential acquirer to obtain a controlling equity interest (more than
50% of voting shares).

Flip-over

Target company’s shareholders can buy the post-merger (acquirer)


company’s stock at a discount. Target company is counterattacking by
diluting the acquirer’s stock.

Golden Parachute

An employment contract that guarantees extensive benefits to


executives if they are made to leave the company. This allows executives
to remain in the company even after a merger.

Greenmail

Target company repurchasing stock from the acquirer or a third party for
a premium price to avoid the stock falling into the hands of the acquirer.

Killer Bees

Public relations firms, law firms, or investment bankers hired by a target


company to help fend off a hostile takeover.

Lobster Trap

Restricting individuals with large amounts of convertible securities from


converting if by doing so the individual is going to hold 10% or more of
the target’s shares.

Pac Man Defense

Target company of a hostile takeover turns around and attempts to


obtain controlling shares of the acquirer.
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Poison Pill

Any of several hostile takeover defenses designed to discourage the


acquirer from pursuing the takeover.

Poison Put

Target companies allow bondholders to sell bonds back at a premium to


make hostile takeovers costlier.

Sandbagging

Target company playing along with the hostile bid and stalling for time
while waiting for a white knight to appear.

Scorched Earth Policy

Target borrows money at extremely high interest rates to make takeover


unattractive. It’s a double-edged sword because although the takeover is
prevented, the company may be destroyed by crippling debt.

Show-stopper

Target starting litigation to thwart an attempt at a takeover.

Supermajority Amendment

A requirement that a very large percentage of shareholders approve of


major decisions of the company – an attempt to fend off hostile
takeovers.

White Knight Defense

A friendly takeover bidder that outbids the Black Knight.

White Squire Defense

An ally of the target company that does not buy enough shares to gain a
controlling interest, but enough to prevent the hostile takeover acquirer
from gaining a controlling interest.

Additional Resources

Thank you for reading CFI’s M&A Glossary of terms and definitions for
understanding mergers and acquisitions. These terms were taken from
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CFI’s advanced Mergers and Acquisitions Modeling Course.

To keep learning and advancing your career these CFI resources will be a
big help:

M&A Process

Horizontal Mergers

Types of Synergies

Deal & Transaction Resources

See all valuation resources

See all equities resources

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