Mergers and acquisitions are exciting periods, but they do come with their own pros and cons. One of the biggest cons of an M&A is how complex it is and how easy it is to make a major mistake because of something small.
The process itself requires a hefty amount of patience and guidance, but there’s another issue that tends to lead to a lot of confusion: Terminology.
Like most complex processes, M&A uses a lot of technical jargon and lingo. When you don’t understand the M&A terms being used, it’s difficult to fully comprehend what’s going on and what you need to do.
To alleviate that issue, we’ve put together this glossary of the most important terms in M&A that converts all that technical jargon into layman’s terms to help you handle your next merger or acquisition more effectively.
Basic Terms to Know
In this section, we want to provide a brief primer covering all the terms that will come up in practically any situation that includes M&A advisors and the professional terminology they use. Terms for more specific situations will be covered later.
To start, you should know what an acquisition is. Business acquisition occurs when one company (the acquirer) buys most or all shares in another company (the target) to assume control of its assets and operations. It doesn’t require the purchaser to own 100% of the company, though, as long as the buyer takes on 51% or more of the company’s shares.
Company A + Company B = Company A
A merger is when a business deal where two existing, independent companies combine to form a new, singular legal entity. When the process is done, the purchased company is 100% absorbed into the acquirer’s company.
Company A + Company B = Company AB
This is essentially a merger, but none of the legal characteristics of either company remains at the end of the process. To put it in simple terms, consolidation is when multiple companies join to form a new business entity.
Company A + Company B + Company C + Company D… = Company F
The acquirer is the entity making the purchase. So, assuming you’re the seller, the “buyer” who is purchasing your shares would be the acquirer.
This term refers to the post-sale increase in share metrics. While it’s not something that happens during the process, projected accretion can be an important leverage point during negotiations.
6: Asset Deal
Sometimes, a buyer doesn’t actually want your company’s shares. Instead, it just wants your assets. Things such as patents, IPs, equipment, contracts, and similar assets. In that situation, you can create an asset deal instead of an acquisition.
With this approach, the acquirer will obtain all the agreed-upon assets, but you’ll maintain ownership of the company’s shares.
The target is the entity selling its company or parts of its company. So, if you were selling a company or assets to an acquirer, you would be the target.
8: Transaction Close Date
This is the date when the deal will be finalized. M&A is not a quick process. This also isn’t a date that is set in stone. It can be adjusted depending on a variety of factors.
Synergy is when two entities combine their efforts and resources to accomplish greater performance and value than they could individually. For example, if you expect the relevant shares to increase in value within a month of finalizing the deal, that would be synergy.
10: Friendly Takeover
This is the optimal way for a merger or acquisition to take place. Everyone is on board, and the board will encourage all shareholders to accept the deal and move forward. It’s the smoothest situation to be in.
11: Hostile Takeover
A hostile takeover is the exact opposite of a friendly takeover. Most, if not all, board members are against the transaction, and they’ll do their best to persuade shareholders to stop it.
12: Cash Consideration
In M&A terms, this is simply the amount of the purchase price expected to be paid directly in cash. Since cash isn’t typically used to cover the entire transaction, this is an important consideration, along with shares and other valuable assets that can go toward the overall purchase.
13: Backward Integration
This is a unique type of acquisition that isn’t entirely financially based. Instead, the acquirer is looking to purchase a company that produces materials necessary for its own business. For example, a computer company might purchase a CPU manufacturer for this reason.
As a result, the supply chain for the acquirer’s most necessary materials is heavily fortified and streamlined.
This is essentially a premium that acquirers pay over what your company is valued to sweeten the deal. It shows that they’re serious and want to look out for your best interests as well as their own. M&A experts usually focus on getting the amount of goodwill to be as large as possible since that’s one of their biggest goals.
15: Intrinsic Value
An intrinsic value is the on-paper value of your business based on discounted share prices. It’s the baseline for the transaction’s overall value before more complicated factors are considered.
16: Net Book Value of Assets
This is the overall value of your assets once you remove the liabilities that will come out of it.
17: Restructuring Charges
This is important. Just because the sale goes off without a hitch doesn’t mean the expenses stop. Restructuring fees are integrated to cover the costs of moving things around and restructuring the involved entities.
18: Timing of Synergies
Synergies are important factors that affect the overall transaction, but the timing of those synergies matters, too.
The term “timing of synergies” is used to describe how long it’s expected to see those predicted synergies reach fruition. For example, you might expect a 20% increase in share value, but that’s not instant. It might take 3 months to see that increase. The 3-month period would be the timing of synergies.
Terms Used for Hostile Takeovers
Hostile takeovers is when a company tries to force an acquisition via the purchase of shares. As such, there are strategies to defend against such takeovers.
Here are the relevant terms you should know in these types of situations.
1: Golden Parachute
This is a last-resort defense against hostile takeovers. Instead of fighting the share purchase, executives within the target company are contractually promised massive benefits if they’re ever forced to leave. When the new company gains voting power, executives can keep their positions since the acquirer doesn’t want to pay extravagant benefits packages.
This creates a financial loss, but it is sometimes necessary. When an acquirer is purchasing shares to achieve 51% voting power, you buy those shares back at a premium. It’s not optimal, but as the price continues to rise, it makes it far less enticing for the acquirer to keep buying your company’s shares.
3: Killer Bees
This is a colorful term used to describe every lawyer or firm you hire to legally prevent a hostile takeover. Each lawyer or legal entity would be a “killer bee” working to stop the acquisition by legal force.
4: Pac-Man Defense
This is the equivalent of a reverse card in Uno in M&A terms. When an acquirer starts buying up your shares, you simply buy shares in their company and attempt to acquire them before they successfully control your company.
This is the term used when you actually start taking legal action against the acquirer. The hostile takeover is immediately paused while the court handles the matter.
6: White Knight and White Squire Defenses
This is why it’s always good to have positive relationships in the business world. When a financially superior company is going to perform a hostile takeover, you can’t singlehandedly stop it. A white knight or white squire can absolutely save the day.
A white squire is a friendly company that buys up shares in your business to make it impossible for the acquirer to get 51% of your voting shares.
They don’t buy enough to acquire the business themselves, but they own enough to make 51% ownership impossible. For example, let’s say you have 33% of your voting shares, and you’re not willing to share. The squire might buy 18% of your shares to stop the takeover.
A white knight is the same concept, but the knight will buy enough to acquire the company. This is a better situation than a hostile takeover, though. The white knight has your interests in mind, while the hostile acquirer does not.
This goes along with white knights and squires. Your allies aren’t as prepared to buy your company, or such large portions of your company, as your hostile acquirer is. It takes time to figure out the details and what they’re capable of doing.
Sandbagging is when you pretend to be interested in the acquirer’s offer, but you essentially waste their time until your knight or squire is ready to come in and make their move.
8: Scorched Earth Policy
This is the first of a few worst-case scenario options. It’s in no way optimal, and while it will stop the vast majority of hostile takeover attempts, your business can easily go under.
Essentially, you just start borrowing a bunch of high-interest money. Very few acquirers will want to buy your business when you’ve attached crippling debt to it.
Obviously, this can be seen as more of an egotistical way out because you’re sinking your own ship to keep someone else from taking the wheel.
9: Poison Pill Defenses
This is one of the most important M&A terms you need to remember. These are actions you take to make your company seem less desirable, but you don’t go quite as far as the scorched-earth policy.
Actions such as intentionally decreasing your profit margins, taking on barely manageable debt, and just generally hovering the business over the line between imminent failure and a good chance for mid-term repair.
This is a dangerous way to prevent an acquisition, but it is sometimes necessary.
10: Crown Jewels
When an acquirer is using the hostile takeover method, it’s because you have something they want. The “Crown Jewels” method of blocking a hostile takeover is simply selling your most valuable assets for the time being. If you get rid of what the acquirer wants, they’ll likely stop their attempt.
Friendly Takeover Terms to Understand
With a friendly takeover, you obviously don’t want to put up your defenses and start damaging your company to block an acquisition.
As such, completely different terms are used in this type of acquisition or merger.
1: Tender Offer
This is the most positive way for an acquisition to take place. Rather than being forceful, the acquirer gives each shareholder a substantial offer in exchange for their share in the company.
2: Godfather Offer
This is similar to a tender offer, but instead of targeting individual shareholders, it’s a group offer. The acquirer will attempt to make a deal that is too good to pass up, and they’ll work with the target to ensure the transaction is a positive experience, such as leaving management in place, not cutting positions, etc.
Takeover Strategies to Look Out for
These are both positive and negative strategies that can be used that don’t fit into either category perfectly.
1: Creeping Takeover
In this situation, the acquirer will slowly purchase enough shares to reach 51% ownership. Hostile takeovers are typically fast and forceful, but this is simply an organic move toward an ultimate goal.
2: Toehold Position
This is neither a merger nor an acquisition. Legal requirements force shareholders to report their assets when they purchase more than 5% of a company’s shares. This strategy involves purchasing shares under that threshold to establish a presence within the company and not have to report it.
This is useful because it can be the start of an acquisition later on that can go either way. A positive relationship can be made that leads to a positive merger, or the acquirer might suddenly perform a dawn raid at an opportune time.
3: Dawn Raid
This is usually used in a hostile takeover, but it can just be a fast way to handle the transaction. When the market opens for share buying, the acquirer buys up every share it can afford immediately.
This can be a hostile takeover if the company can afford 51% of shares, or multiple dawn raids can be used to eventually get to the 51% mark. However, it can also be a quick way for a white knight or squire to block a hostile takeover.
Either way, it is a quick, dirty, and to-the-point method of acquiring shares.
Understand M&A with Final Ascent
Now you’re equipped with the knowledge about M&A terms you need to understand, but there are still plenty of terms out there that can give you trouble. On top of that, the process itself is difficult unless you specialize in it.
That’s why it’s always important to get professional guidance when dealing with mergers and acquisitions processes.
Whether you’re facing a hostile takeover or you’re simply preparing to exit your middle-market business and retire.
Contact us for start-to-finish M&A guidance that counts.