32 terms · Plain English
The M&A
Glossary
The vocabulary of dealmaking, defined the way a senior banker would explain it. Each term links to the deals and primers where you can see it used in the wild.
Deal tactics
- Greenmail Greenmail is the practice of buying a large stake in a company, threatening a takeover, and then selling the stake back to the company at a premium in exchange for going away.
- Hostile Takeover A hostile takeover is an acquisition attempt made directly to a company’s shareholders, against the wishes of its board and management.
- Proxy Fight A proxy fight is a campaign to win shareholder votes in order to replace a company’s board of directors, rather than buying the shares outright.
- Tender Offer A tender offer is a public offer to buy shares directly from a company’s shareholders at a stated price, usually at a premium to the market.
- Winner's Curse The winner’s curse is the tendency of the winning bidder in an auction to be the party that most overestimated the value of the prize.
Takeover defenses
- Crown Jewel Defense A crown jewel defense is a tactic where a takeover target agrees to sell its most valuable assets, the crown jewels, to a third party, making the company less attractive to the hostile bidder.
- Golden Parachute A golden parachute is a contract that pays a company’s executives large severance packages if the company is taken over and they lose their jobs.
- Poison Pill A poison pill is a defense that lets existing shareholders buy new shares at a steep discount once a hostile bidder crosses an ownership threshold, massively diluting the bidder’s stake.
- White Knight A white knight is a friendly buyer that a company under hostile attack invites in as an alternative acquirer.
Valuation & accounting
- EBITDA EBITDA stands for earnings before interest, taxes, depreciation, and amortization.
- Enterprise Value (EV) Enterprise value is the total value of a company’s operations: its equity market value plus net debt.
- Net Working Capital (NWC) Net working capital is a company’s current assets minus its current liabilities, the short-term capital tied up in running the business day to day.
- Sum-of-the-Parts (SOTP) Sum-of-the-parts is a valuation method that values each of a company’s business lines separately and adds them up, often revealing that the pieces are worth more than the market price of the whole.
- Synergies Synergies are the cost savings or revenue gains a buyer expects from combining two companies, value that exists only because of the merger.
Private equity
- Continuation Fund A continuation fund is a new vehicle a private equity firm raises to buy one or more companies from its own older fund, letting it keep a prized asset past the original fund’s life.
- Dry Powder Dry powder is capital that investors have committed to a fund but that has not yet been invested, money raised and waiting for deals.
- Internal Rate of Return (IRR) IRR is the annualized rate of return implied by an investment’s cash flows, the single discount rate at which the money in equals the money out.
- Leveraged Buyout (LBO) A leveraged buyout is the acquisition of a company using a large amount of borrowed money, with the target company’s own cash flows used to repay the debt.
- MOIC (Multiple on Invested Capital) MOIC is the total money returned by an investment divided by the money put in.
- Multiple Arbitrage Multiple arbitrage is making money by buying a business at a low valuation multiple and selling it at a higher one, even if the earnings never grow.
- Roll-Up A roll-up is a strategy of acquiring many small companies in the same fragmented industry and combining them into one larger platform.
- Rollover Equity Rollover equity is the portion of a seller’s proceeds reinvested into the buyer’s new ownership structure instead of taken as cash, leaving the seller with a stake in the business after the sale.
- Search Fund A search fund is a vehicle through which one entrepreneur, often a recent MBA, raises money from investors to find, buy, and personally run a single small company.
Debt & financing
- Highly Confident Letter A highly confident letter is an investment bank’s written statement that it is "highly confident" it can raise the financing for a proposed deal, short of a binding commitment but strong enough to make a bid credible.
- Junk Bond A junk bond, formally a high-yield bond, is a bond rated below investment grade, meaning rating agencies judge the borrower more likely to default.
- Mezzanine Debt Mezzanine debt is financing that sits between senior debt and equity in a company’s capital structure: it is repaid after the senior lenders but before shareholders.
- NAV Financing NAV financing is a loan to a private equity fund secured against the net asset value of its whole portfolio, rather than against a single company.
Process & legal
- Data Room A data room is the secure repository, today almost always virtual, where a seller assembles the documents buyers need for due diligence: financial statements, contracts, employee agreements, litigation records, and more.
- Due Diligence Due diligence is the investigation a buyer performs on a target company before completing a deal: verifying the financials, contracts, customers, legal exposure, and everything else the price depends on.
- Earnout An earnout is a portion of the purchase price that is paid only if the business hits agreed targets after closing, usually revenue or EBITDA over one to three years.
- Letter of Intent (LOI) A letter of intent is the preliminary agreement that sets out the headline terms of a deal, price, structure, exclusivity, before full diligence and final contracts.
- Revlon Duties Revlon duties are the legal obligations of a company’s board once the sale of the company has become inevitable: at that point the board must stop defending and instead seek the highest price reasonably available for shareholders.
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