KEY TERMS IN MERGERS AND ACQUISITIONS

Transcription

1 Surviving M&A: Make the Most of Your Company Being Acquired By Scott Moeller Copyright 2009 John Wiley & Sons, Ltd. KEY TERMS IN MERGERS AND ACQUISITIONS Acquisition When one company (the buyer ) purchases a second, usually smaller, company (the target ); the second company ceases to exist and the assets of the target are then controlled by the buyer. The employees of the target now work for the buyer (excepting those employees fired as part of the acquisition process). If both companies cease to exist and a third company is created from the two legacy companies, the term generally used to describe the deal is merger. Analyst Also sometimes called researcher, this is the entry - level client - facing position in most investment banking M & A departments. Analysts usually are hired directly from university and join after receiving their undergraduate degree. Most stay with the bank for two years (sometimes three) before either returning to university for their MBA or are (more rarely) promoted (see associate ). The term analyst also refers to the individuals in a bank or other equity research institution who provide market research on companies. Announcement date The formal and public disclosure of a pending M & A deal. Prior to announcement, there may be rumors in the market about the

2 228 KEY TERMS IN MERGERS AND ACQUISITIONS deal and even leaks, but they have not been confi rmed. The announcement is usually made through a press release and perhaps a press conference at which the CEO of the purchaser and often the target are available for questioning by journalists and market analysts. If the company is listed on a stock exchange, the exchange will also need to be informed on announcement day and, depending on the deal, other regulators may also need to be informed. Associate This is the position in most investment banking M & A departments where employees begin to have responsibility for the creation of analyses and reports for clients. They will be supported by and supervise analysts on specifi c projects and train those analysts in analytical skills. Most associates have no staff reporting to them full - time (except on a project basis). In some fi rms, there is a further intermediate step in the promotion ladder of senior associate, which is also sometimes called assistant vice - president. Auction When two or more companies are competing to buy the target. This usually results in a higher price for the target but increases the time when there is uncertainty on the part of employees of the target as to their eventual owner. Bear hug When the bidder makes a very high offer for the target in an attempt to gain quick acceptance by the target s management and board, and to prevent other bidders from taking over the target. Most bear hug offers include the implicit threat that the bidder will make a hostile takeover offer if the target board does not accept the bear hug offer. Bulge bracket investment bank Within the M & A industry, this refers to an elite group of global investment banking advisory fi rms who will typically do the most number and value of deals year after year.

3 KEY TERMS IN MERGERS AND ACQUISITIONS 229 The City A term to denote the area in London where banks traditionally were located. Geographically, it comprises the area (approximately a square mile in size, and thus also sometimes called The Square Mile ) that was contained within London s Roman walls. Closing The day during the merger or acquisition process when the two companies formally become one: if an acquisition, it will be the day when the target company ceases to exist and is absorbed into the buyer; for a merger, it is when both companies cease to operate and a new company is formed from those two companies. Conglomerate A company that is composed of divisions that are generally unrelated to each other and where few synergies can be gained through the combination of those businesses. A conglomerate acquisition is one where the buyer s existing group of businesses is unrelated to any of the businesses of the target. Divestiture (or spin - off ) The sale of a business, usually an entire division or a product line. This is sometimes planned when a company makes an acquisition because (1) for regulatory (monopoly or competition) reasons the buyer would otherwise have too large a business or (2) the buyer purchased the target for specifi c assets and never intended to keep some unrelated assets of the target and therefore is now unloading them. Due diligence The process during an M & A deal whereby one company investigates the details, often looking at non - public information, of the other company. Due diligence can be conducted without actually contacting the other company, but normally refers to the process

4 230 KEY TERMS IN MERGERS AND ACQUISITIONS when access to the target company is granted to a purchaser (or among the two companies in a merger). First 100 days The period immediately after closing when the two companies begin their integration. This fi rst 100 days is normally a time of intense activity when key decisions about the newly combined companies are implemented and also when most of the employees who are going to be made redundant will be informed. Integration continues after this time, but at a lower level of activity in most areas. Friendly acquisition From the target company s perspective, this is a deal that is agreed by management. The target company s management will recommend that the company s shareholders approve the deal. In a friendly deal, the target usually agrees to let the buyer have access to confi dential information before closing. Golden parachute/silver parachute/tin parachute Special compensation arrangements (special bonus, stock options, vesting of previously awarded compensation) between a company and its senior executives in case the company is acquired. Sometimes any acquisition will trigger the golden parachute, but in other cases it is triggered only when the deal is hostile. Usually, the golden parachute award will be signifi cant in comparison to the executive s normal compensation. Silver parachutes refer to similar awards granted to lower level executives and even senior managers; tin parachutes are similar awards granted to all employees below those levels. Hedge fund Hedge funds are investment vehicles for high net worth individuals who invest in a variety of different classes of investments, including

5 KEY TERMS IN MERGERS AND ACQUISITIONS 231 (as related to M & A deals) the shares of publicly listed companies and privately held companies. Each fund will have a particular investment strategy but these can vary greatly between funds. They traditionally have had minimal regulation from government authorities but may be more tightly regulated in the future. Hostile takeover From the target company s perspective, this is an unwelcome attempt by a buyer to purchase the company. In most hostile takeovers, the target company s senior executives and board of directors will actively resist the purchase through actions taken to defeat the purchaser (including fi nding a friendlier buyer) and will recommend to its shareholders that they vote against the purchase if the deal proceeds that far. If a deal is not hostile, it will be called a friendly takeover. Investment bank Usually, the principal advisor on an M & A deal. The investment banker will have many responsibilities during the deal, but most often will coordinate the activities of other advisors, identify potential target companies (or buyers, if representing a company for sale), provide advice on structuring the deal and the pricing (including arranging fi nancing if required), and generally support senior management of the target or buyer during the deal. Some investment banks can provide the fi nancing as well, whereas other specialist investment banks may provide only the advisory work. Leverage Commonly used to indicate a company or deal that has or uses a large amount of debt, typically at a level over one - third of the total fi nancing. Magic Circle law fi rm The elite group of leading global law fi rms based in London.

6 232 KEY TERMS IN MERGERS AND ACQUISITIONS Merger When two companies agree to combine all their operations to create a third company, while at the same time exchanging all of the assets and ownership of the two legacy companies for the new third company. The two legacy companies therefore cease to exist. In most mergers, the two legacy companies are usually of similar size, or else it is more likely that the deal will be structured as an acquisition. Most mergers are friendly. Note that common usage applies the term merger to many transactions that should strictly be called acquisitions. Outplacement Firms or individual consultants who provide advice and support to employees who have been or will be made redundant. Most outplacement fi rms are paid by the company that has made the employee redundant, but individuals can also pay for these services themselves if their fi rms do not. Post - merger integration The period that starts upon the closing of a deal but that can last anywhere from a few months to a number of years. The post - merger integration is the time in an acquisition when all of the operations of the target company are absorbed into the buyer; if the deal was structured as a merger, then this is the time when the operations of both legacy companies are combined. Private equity fi rm An investment manager who will purchase the equity of companies that are not publicly listed on a stock exchange (and therefore privately traded). Private equity fi rms, as with venture capital fi rms and hedge funds, will usually plan to sell their equity at a later point after having made a certain profi t on the shares that they own. See also Venture capital fi rm.

7 KEY TERMS IN MERGERS AND ACQUISITIONS 233 Synergy This is the = 3 effect where the impact of two companies combining creates a stronger company than the sum of the two companies when they were independent of each other. Expense synergies (including headcount reductions) refer to the situation following a merger or acquisition where functions that were duplicated across the two companies can now be reduced when they are combined (e.g. there s only need for one CEO, not two). Takeover Usually, a term denoting an unfriendly (see Hostile takeover ) bid for a company, but can refer to any merger or acquisition. Venture capital fi rm A venture capital fi rm is an investment manager who will purchase the equity of start - up or relatively new, early - stage growth companies before they are publicly listed on a stock exchange. This investment in the company s equity will allow it to fund its next stage of growth. See also Private equity fi rm. Wall Street The location in New York City of the New York Stock Exchange and, in the streets surrounding Wall Street, the original headquarters of many of the largest banks and investment banks in the USA. White Knight A friendly acquirer sought by the target to purchase the company instead of a hostile bidder.