M&A Glossary

Definitions of all things M&A related

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.

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, 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.

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

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

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).

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.

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.

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 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