Abnormal return The return to shareholders due to nonrecurring events that differs from what would have been predicted by the market. It is the return due to an event such as a merger or acquisition.

Acquisition The purchase by one company of a controlling ownership interest in another firm, a legal subsidiary of another firm, or selected assets of another firm.

Acquirer A firm that attempts to acquire a controlling interest in another company.

Acquisition vehicle The legal structure used to acquire another company.

Advance ruling An IRS ruling sought by acquirers and targets planning to enter into a tax-free transaction. A favorable ruling is often a condition of closing.

Affirmative covenant A portion of a loan agreement that specifies the actions the borrowing firm agrees to take during the term of the loan.

Antigreenmail provisions Amendments to corporate charters restricting the firm’s ability to repurchase shares from specific shareholders at a premium.

Antitakeover amendments Amendments to corporate charters designed to slow or make more expensive efforts to take control of the firm.

Antitrust laws Federal laws prohibiting individual corporations from assuming too much market power.

Appraisal rights Rights to seek “fair value” for their shares in court given to target company shareholders who choose not to tender shares in the first or second tier of a tender offer.

Arbitrageurs (arbs) In the context of M&As, arbs are speculators who attempt to profit from the difference between the bid price and the target firm’s current share price.

Asset-based lending A type of lending in which the decision to grant a loan is based largely on the quality of the assets collateralizing the loan.

Asset impairment An asset is said to be impaired according to FASB Statement 142 if its fair value falls below its book or carrying value.

Asset purchases Transactions in which the acquirer buys all or a portion of the target company’s assets and assumes all, some, or none of the target’s liabilities.

Assignment The process through which a committee representing creditors grants the power to liquidate a firm’s assets to a third party, called an assignee or trustee.

Asymmetric information Information about a firm that is not equally available to both managers and shareholders.

Automatic stay The requirement for a period of time following the submission of a petition for bankruptcy in which all judgments, collection activities, foreclosures, and repossessions of property are suspended and may not be pursued by the creditors on any debt or claim that arose before the filing of the bankruptcy petition.

Back end merger The merger following either a single- or two-tier tender offer consisting of either a long-form or short-form merger, with the latter not requiring a target firm shareholder vote.

Bankruptcy A federal legal proceeding designed to protect the technically or legally insolvent firm from lawsuits by its creditors until a decision can be made to shut down or continue to operate the firm.

Bear hug A takeover tactic involving the mailing of a letter containing an acquisition proposal to the board of directors of a target company without prior warning and demanding a rapid decision.

Beta A measure of nondiversifiable risk or the extent to which a firm’s (or asset’s) return changes because of a change in the market’s return.

Bidder See acquirer.

Boot The nonequity portion of the purchase price.

Breakup fee A fee that would be paid to the potential acquirer if the target firm decides to accept an alternative bid. Also called a termination fee.

Bridge financing Temporary unsecured short-term loans provided by investment banks to pay all or a portion of the purchase price and meet immediate working capital requirements until permanent or long-term financing is found.

Business alliance A generic term referring to all forms of business combinations other than mergers and acquisitions.

Business-level strategies Strategies pertaining to a specific operating unit or product line within a firm.

Business strategy or model That portion of a business plan detailing the way the firm intends to achieve its vision.

Buyout Change in controlling interest in a corporation.

Capital asset pricing model A framework for measuring the relationship between expected risk and return.

Capitalization multiple The multiple estimated by dividing 1 by the estimated discount that can be used to estimate the value of a business by multiplying it by an indicator of value such as free cash flow.

Capitalization rate The “cap rate,” represents the ratio of net operating income divided by asset value. Net operating income is total revenue less operating expenses. It is before taxes and excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.

Cash-for-assets An acquisition in which the acquirer pays cash for the seller’s assets and may choose to accept some or all of the seller’s liabilities.

Cash-out statutory merger A merger in which the shareholders of the selling firm receive cash or some form on nonvoting investment (e.g., debt, or nonvoting preferred or common stock) for their shares.

Certificate of incorporation A document received from the state once the articles of incorporation have been approved.

Classified board election An antitakeover defense involving the separation of a firm’s board into several classes, only one of which is up for election at any one point in time. Also called a staggered board.

Closing The phase of the acquisition process in which ownership is transferred from the target to the acquiring firm in exchange for some agreed-on consideration following the receipt of all necessary shareholder, regulatory, and third-party approvals.

Closing conditions Stipulations that must be satisfied before closing can take place.

Collar agreement An arrangement providing for certain changes in the share exchange ratio contingent on the level of the acquirer’s share price around the effective date of the merger.

Common-size financial statements Valuation calculated by taking each line item as a percentage of revenue.

Composition An agreement in which creditors consent to settling for less than the full amount they are owed.

Confidentiality agreement A mutually binding accord defining how information exchanged among the parties may be used and the circumstances under which the discussions may be made public. Also known as a nondisclosure agreement.

Conglomerate discount The share prices of conglomerates often trade at a discount from focused firms or their value if they were broken up and sold in pieces.

Conglomerate mergers Transactions in which the acquiring company purchases firms in largely unrelated industries.

Consent decree Requires the merging parties to divest overlapping businesses or restrict anticompetitive practices.

Consent solicitation A process enabling dissident shareholders in certain states to obtain shareholder support for their proposals by simply obtaining their written consent.

Consolidation A business combination involving two or more companies joining to form a new company, in which none of the combining firms survive.

Constant growth model A valuation method that assumes that cash flow will grow at a constant rate.

Contingent value rights (CVR) Commitments by the issuing company to pay additional cash or securities to the holder of the CVR if the share price of the issuing company falls below a specified level at some future date.

Control premium The excess over the target’s current share price the acquirer is willing to pay to gain a controlling interest. A pure control premium is one in which the anticipated synergies are small and the perceived value of the purchase is in gaining control to direct the activities of the target firm.

Corporate bylaws Rules governing the internal management of the corporation, which are determined by the corporation’s founders.

Corporate charters A state license defining the powers of the firm and the rights and responsibilities of its shareholders, board of directors, and managers. The charter consists of articles of incorporation and a certificate of incorporation.

Corporate governance The systems and controls in place to protect the rights of corporate stakeholders.

Corporate restructuring Actions taken to expand or contract a firm’s basic operations or fundamentally change its asset or financial structure.

Cost leadership A strategy designed to make a firm the cost leader in its market by constructing efficient production facilities, tightly controlling overhead expense, and eliminating marginally profitable customer accounts.

Covenants Promises made by the borrower that certain acts will be performed and others will be avoided.

Cram down A legal reorganization occurring whenever one or more classes of creditors or shareholders approve, even though others may not.

Cumulative voting rights In an election for a board of directors, each shareholder is entitled to as many votes as equal the number of shares the shareholder owns multiplied by the number of directors to be elected. Furthermore, the shareholder may cast all of these votes for a single candidate or any two or more of them.

Deal-structuring process The process focused on satisfying as many of the primary objectives of the parties involved and determining how risk will be shared.

Debt-for-equity swap Creditors surrender a portion of their claims on the firm in exchange for an ownership position in the firm.

Debtor-in-possession On the filing of a reorganization petition, the firm’s current management remains in place to conduct the ongoing affairs of the firm.

Debt restructuring Involves concessions by creditors that lower an insolvent firm’s payments so that it may remain in business.

Definitive agreement of purchase and sale The legal document indicating all of the rights and obligations of the parties both before and after closing.

Destroyers of value Factors that can reduce the future cash flow of the combined companies.

Discounted cash flow The conversion of future to current cash flows by applying an appropriate discount rate.

Discount rate The opportunity cost associated with investment in the firm used to convert the projected cash flows to present values.

Dissident shareholders Those that disagree with a firm’s incumbent management and attempt to change policies by initiating proxy contests to gain representation on the board of directors.

Diversifiable risk The risk specific to an individual firm, such as strikes and lawsuits.

Diversification A strategy of buying firms outside of the company’s primary line of business.

Divestiture The sale of all or substantially all of a company or product line to another party for cash or securities.

Divisional organization An organizational structure in which groups of products are combined into independent divisions or “strategic business units.”

Dual class recapitalization A takeover defense in which a firm issues multiple classes of stock in which one class has voting rights that are 10–100 times those of another class. Such stock is also called supervoting stock.

Due diligence The process by which the acquirer seeks to determine the accuracy of the target’s financial statements, evaluate the firm’s operations, validate valuation assumptions, determine fatal flaws, and identify sources and destroyers of value.

Earnouts Payments to the seller based on the acquired business achieving certain profit or revenue targets.

Economic value The present value of a firm’s projected cash flows.

Economies of scale The spreading of fixed costs over increasing production levels.

Economies of scope The use of a specific set of skills or an asset currently used to produce a specific product to produce related products.

Effective control Control achieved when one firm has purchased another firm’s voting stock, it is not likely to be temporary, there are no legal restrictions on control such as from a bankruptcy court, and there are no powerful minority shareholders.

Employee stock ownership plan (ESOP) A trust fund or plan that invests in the securities of the firm sponsoring the plan on behalf of the firm’s employees. Such plans are generally defined contribution employee-retirement plans.

Enterprise cash flow Cash available to shareholders and lenders after all operating obligations of the firm have been satisfied.

Enterprise value Viewed from the liability side of the balance sheet, it is the sum of the market or present value of a firm’s common equity plus preferred stock and long-term debt. For simplicity, other long-term liabilities are often excluded from the calculation. From the perspective of the asset side of the balance sheet, it is equal to cash plus the market value of current operating and nonoperating assets less current liabilities plus long-term assets.

Equity beta A measure of the risk of a stock’s financial returns, as compared with the risk of the financial returns to the general stock market, which in turn is affected by the overall economy.

Equity carve-out A transaction in which the parent firm issues a portion of its stock or that of a subsidiary to the public.

Equity cash flow Cash available to common shareholders after all operating obligations of the firm have been satisfied.

Equity premium The rate of return in excess of the risk-free rate investors require to invest in equities.

Excess returns See abnormal returns.

Exchange offer A tender offer involving a share-for-share exchange.

Exit strategy A strategy enabling investors to realize their required returns by undertaking an initial public offering or selling to a strategic buyer.

Extension Creditor agreement to lengthen the period during which the debtor firm can repay its debt and, in some cases, to temporarily suspend both interest and principal repayments.

Fair market value The cash or cash-equivalent price a willing buyer would propose and a willing seller would accept for a business if both parties have access to all relevant information.

Fairness opinion letter A written and signed third-party assertion certifying the appropriateness of the price of a proposed deal involving a tender offer, merger, asset sale, or leveraged buyout.

Fair value An estimate of the value of an asset when no strong market exists for a business or it is not possible to identify the value of substantially similar firms.

Financial buyer Acquirers that focus on relatively short to intermediate financial returns.

Financial restructuring Actions by the firm to change its total debt and equity structure.

Financial sponsor An investor group providing equity financing in leveraged buyout transactions.

Financial synergy The reduction in the cost of capital as a result of more stable cash flows, financial economies of scale, or a better matching of investment opportunities with available funds.

Fixed or constant share-exchange agreement An exchange agreement in which the number of acquirer shares exchanged for each target share is unchanged between the signing of the agreement of purchase and sale and closing.

Fixed value agreement The value of the price per share is fixed by allowing the number of acquirer shares issued to vary to offset fluctuations in the buyer’s share price.

Flip-in poison pill A shareholders’ rights plan in which the shareholders of the target firm can acquire stock in the target firm at a substantial discount.

Flip-over poison pill A shareholders’ rights plan in which target firm shareholders may convert such rights to acquire stock of the surviving company at a substantial discount.

Form of acquisition The determination of what is being acquired (i.e., stock or assets).

Form of payment A means of payment: cash, common stock, debt, or some combination. Some portion of the payment may be deferred or dependent on the future performance of the acquired entity.

Forward triangular merger The acquisition subsidiary being merged with the target and the acquiring subsidiary surviving.

Fraudulent conveyance Laws governing the rights of shareholders if the new company created following an acquisition or LBO is inadequately capitalized to remain viable.

Free cash flow The difference between cash inflows and cash outflows, which may be positive, negative, or zero.

Friendly takeover Acquisition when the target’s board and management are receptive to the idea and recommend shareholder approval.

Functional strategies Description in detail of how each major function (e.g., manufacturing, marketing, and human resources) within the firm will support the business strategy.

Generally accepted accounting principles (GAAP) Accounting guidelines established by the Financial Accounting Standards Board.

General partner An individual responsible for the daily operations of a limited partnership.

Global capital asset pricing model A version of the capital asset pricing model in which a global equity index is used in calculating the equity risk premium.

Globally integrated capital markets Capital markets providing foreigners with unfettered access to local capital markets and local residents to foreign capital markets.

Going concern value The value of a company defined as the firm’s value in excess of the sum of the value of its parts.

Going private The purchase of the publicly traded shares of a firm by a group of investors.

Golden parachutes Employee severance arrangements that are triggered whenever a change in control takes place.

Goodwill The excess of the purchase price over the fair value of the acquired net assets on the acquisition date.

Go-shop provision A provision allowing a seller to continue to solicit other bidders for a specific time period after an agreement has been signed but before closing. However, the seller that accepts another bid must pay a breakup fee to the bidder with which it had a signed agreement.

Greenmail The practice of a firm buying back its shares at a premium from an investor threatening a takeover.

Hedge fund Private investment limited partnerships (for US investors) or off-shore investment corporations (for non-US or tax exempt investors) in which the general partner has made a substantial personal investment.

Herfindahl-Hirschman Index The measure of industry concentration used by the Federal Trade Commission as one criterion in determining when to approve mergers and acquisitions.

Highly leveraged transactions Those involving a substantial amount of debt relative to the amount of equity invested.

Holding company A legal entity often having a controlling interest in one or more companies.

Holdout problem Tendency for smaller creditors to hold up the agreement among creditors during reorganization unless they receive special treatment.

Horizontal merger A combination of two firms within the same industry.

Hostile takeover Acquisition when the initial bid was unsolicited, the target was not seeking a merger at the time of the approach, the approach was contested by the target’s management, and control changed hands.

Hostile tender offer A tender offer that is unwanted by the target’s board.

Hubris An explanation for takeovers that attributes a tendency to overpay to excessive optimism about the value of a deal’s potential synergy or excessive confidence in management’s ability to manage the acquisition.

Impaired asset As defined by FASB, a long-term asset whose fair value falls below its book or carrying value.

Implementation strategy The way in which the firm chooses to execute the business strategy.

Indemnification A common contractual clause requiring the seller to indemnify or absolve the buyer of liability in the event of misrepresentations or breaches of warranties or covenants. Similarly, the buyer usually agrees to indemnify the seller. In effect, it is the reimbursement to the other party for a loss for which it was not responsible.

Initial offer price A price that lies between the estimated minimum and maximum offer prices for a target firm.

Insider trading Individuals buying or selling securities based on knowledge not available to the general public.

Interest rate parity theory A theory that relates forward or future spot exchange rates to differences in interest rates between two countries adjusted by the spot rate.

Investment bankers Advisors who offer strategic and tactical advice and acquisition opportunities, screen potential buyers and sellers, make initial contact with a seller or buyer, and provide negotiation support, valuation, and deal structuring advice.

Involuntary bankruptcy A situation in which creditors force a debtor firm into bankruptcy.

Joint venture A cooperative business relationship formed by two or more separate entities to achieve common strategic objectives.

Junk bonds High-yield bonds either rated by the credit-rating agencies as below investment grade or not rated at all.

Legal form of the selling entity Whether the seller is a C or subchapter S corporation, a limited liability company, or a partnership.

Legal insolvency When a firm’s liabilities exceed the fair market value of its assets.

Letter of intent Preliminary agreement between two companies intending to merge that stipulates major areas of agreement between the parties.

Leveraged buyout Purchase of a company financed primarily by debt.

Leveraged loans Unrated or noninvestment grade bank loans whose interest rates are equal to or greater than the London Inter Bank Rate plus 150 basis points.

Liquidating dividend Proceeds left to shareholders after company is liquidated and outstanding obligations to creditors are paid off.

Liquidation The value of a firm’s assets sold separately less its liabilities and expenses incurred in breaking up the firm.

Liquidity discount The discount or reduction in the offer price for the target firm made by discounting the value of the target firm estimated by examining the market values of comparable publicly traded firms to reflect the potential loss in value when sold due to the illiquidity of the market for similar types of investments. The liquidity discount also is referred to as a marketability discount.

Liquidity risk See marketability risk.

Management buyout A leveraged buyout in which managers of the firm to be taken private are also equity investors in the transaction.

Management entrenchment theory A theory that managers use a variety of takeover defenses to ensure their longevity with the firm.

Management integration team Senior managers from the two merged organizations charged with delivering on sales and operating synergies identified during the preclosing due diligence.

Management preferences The boundaries or limits that senior managers of the acquiring firm place on the acquisition process.

Managerialism theory A theory espousing that managers acquire companies to increase the acquirer’s size and their own remuneration.

Marketability discount See liquidity discount.

Marketability risk The risk associated with an illiquid market for the specific stock. Also called liquidity risk.

Market power A situation in which the merger of two firms enables the resulting combination to profitably maintain prices above competitive levels for a significant period.

Market power hypothesis A theory that firms merge to gain greater control over pricing.

Maximum offer price The sum of the minimum price plus the present value of net synergy.

Merger A combination of two or more firms in which all but one legally cease to exist.

Merger-acquisition plan A specific type of implementation strategy that describes in detail the motivation for the acquisition and how and when it will be achieved.

Merger arbitrage An investment strategy that attempts to profit from the spread between a target firm’s current share price and a pending takeover bid.

Merger of equals A merger framework usually applied whenever the merger participants are comparable in size, competitive position, profitability, and market capitalization.

Mezzanine financing Capital that in liquidation has a repayment priority between senior debt and common stock.

Minimum offer price The target’s stand-alone or present value or its current market value.

Minority discount The reduction in the value of their investment in a firm since the minority investors cannot direct the activities of the firm.

Minority investment A less than controlling interest in another firm.

Negative covenant Restriction found in loan agreements on the actions of the borrower.

Negotiating price range The difference between the minimum and maximum offer prices.

Net asset value The difference between the fair market value of total identifiable acquired assets and the value of acquired liabilities.

Net debt The market value of debt assumed by the acquirer less cash and marketable securities on the books of the target firm.

Net operating loss carryforward and carrybacks Provisions in the tax laws allowing firms to use accumulated net tax losses to offset income earned over a specified number of future years or recover taxes paid during a limited number of prior years.

Net purchase price The total purchase price plus other assumed liabilities less the proceeds from the sale of discretionary or redundant target assets.

Net synergy The difference between estimated sources of value and destroyers of value.

Nondiversifiable risk Risk generated by factors that affect all firms, such as inflation and war.

Nonrecourse financing Loans granted to a venture without partner guarantees.

No-shop agreement That which prohibits the takeover target from seeking other bids or making public information not currently readily available while in discussions with a potential acquirer.

One-tiered offer A bidder announces the same offer to all target shareholders.

Open market share repurchase The act of a corporation buying its shares in the open market at the prevailing price as any other investor, as opposed to a tender offer for shares or a repurchase resulting from negotiation such as with an unwanted investor.

Operating synergy Increased value resulting from combination of businesses due to such factors economies of scale and scope.

Operational restructuring The outright or partial sale of companies or product lines or downsizing by closing unprofitable or nonstrategic facilities.

Payment-in-kind (PIK) notes Equity or debt that pays dividends or interest in the form of additional equity or debt.

Permanent financing Financing usually consisting of long-term unsecured debt.

Poison pills A new class of securities issued as a dividend by a company to its shareholders, giving shareholders rights to acquire more shares at a discount.

Portfolio companies Companies in which the hedge or private equity fund has made investments.

Postclosing organization The organizational and legal framework used to manage the combined businesses following the completion of the transaction.

Prepackaged bankruptcies A situation in which the failing firm starts negotiating with its creditors well in advance of filing for a Chapter 11 bankruptcy in order to reach agreement on major issues before formally filing for bankruptcy.

Private corporation A firm whose securities are not registered with state or federal authorities.

Private equity fund Limited partnerships in which the general partner has made a substantial personal investment.

Private placements The sale of securities to institutional investors, such as pension funds and insurance companies, for investment rather than for resale. Such securities do not have to be registered with the SEC.

Private solicitation A firm hires an investment banker or undertakes on its own to identify potential buyers to be contacted as potential buyers for the entire firm or a portion of the firm.

Pro forma financial statements A form of accounting that presents financial statements in a way that purports to more accurately describe a firm’s current or projected performance.

Proxy contest An attempt by dissident shareholders to obtain representation on the board of directors or to change a firm’s bylaws.

Public solicitation Public announcement by a firm that it is putting itself, a subsidiary or a product line up for sale.

Purchase accounting A form of accounting for financial reporting purposes in which the acquired assets and assumed liabilities are revalued to their fair market value on the date of acquisition and recorded on the books of the acquiring company.

Purchasing power parity theory The theory stating that one currency will appreciate (depreciate) with respect to another currency according to the expected relative rates of inflation between the two countries.

Purchase premium The excess of the offer price over the target’s current share price, which reflects both the value of expected synergies and the amount necessary to obtain control.

Pure control premium The value the acquirer believes can be created by replacing incompetent management or changing the strategic direction of the firm.

Pure play A firm whose products or services focus on a single industry or market.

Real options Management’s ability to adopt and later revise corporate investment decisions.

Receivership Court appointment of an individual to administer the assets and affairs of a business in accordance with its directives.

Retention bonuses Incentives granted key employees of the target firm if they remain with the combined companies for a specific period following completion of the transaction.

Revenue ruling An official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties, and regulations.

Reverse breakup fee Fees paid to a target firm in the event the bidder wants to withdraw from a signed contract.

Reverse LBOs Public companies that are taken private and later are taken public again. The second effort to take the firm public is called a secondary public offering.

Reverse merger Process by which a private firm goes public by merging with a public firm with the public firm surviving.

Reverse triangular merger The merger of the target with a subsidiary of the acquiring firm, with the target surviving.

Right of first refusal A contract clause requiring that a party wishing to leave a joint venture or partnership to first offer its interests to other participants in the JV or partnership.

Risk-free rate of return The return on a security with an exceedingly low probability of default, such as US Treasury securities, and minimal reinvestment risk.

Risk premium The additional rate of return in excess of the risk-free rate that investors require to purchase a firm’s equity. Also called the equity premium.

Secondary public offering A stock offering by a private company that had previously been a public company.

Secured debt Debt backed by the borrower’s assets.

Security agreement A legal document stipulating which of the borrower’s assets are pledged to secure the loan.

Segmented capital markets Capital markets exhibiting different bond and equity prices in different geographic areas for identical assets in terms of risk and maturity.

Self-tender offer A tender offer used when a firm seeks to repurchase its stock from its shareholders.

Share-exchange ratio The number of shares of the acquirer’s stock to be exchanged for each share of the target’s stock.

Shareholders’ interest theory The presumption that management resistance to proposed takeovers is a good bargaining strategy to increase the purchase price for the benefit of the target firm shareholders.

Shark repellants Specific types of takeover defenses that can be adopted by amending either a corporate charter or its bylaws.

Shell corporation One that is incorporated but has no significant assets or operations.
Sources of value factors increasing the cash flow of the combined companies.

Spin-off A transaction in which a parent creates a new legal subsidiary and distributes shares it owns in the subsidiary to its current shareholders as a stock dividend.

Split-off A variation of a spin-off in which some parent company shareholders receive shares in a subsidiary in return for relinquishing their parent company shares.

Split-up A transaction in which a parent firm splits its assets between two or more subsidiaries and the stock of each subsidiary is offered to its shareholders in exchange for their parent firm shares.

Staggered board election A takeover defense involving the division of the firm’s directors into a number of different classes, with no two classes up for reelection at the same time. Also called a classified board.

Stakeholders Groups having interests in a firm, such as customers, shareholders, employees, suppliers, regulators, and communities.

Stand-alone business One whose financial statements reflect all the costs of running the business and all the revenues generated by the business.

Standstill agreement A contractual arrangement in which the acquirer agrees not to make any further investments in the target’s stock for a stipulated period.

Statutory consolidation Involves two or more companies joining to form a new company.

Statutory merger The combination of the acquiring and target firms, in which one firm ceases to exist, in accordance with the statutes of the state in which the combined businesses will be incorporated.

Stock-for-stock statutory merger A merger in which the seller receives acquirer shares in exchange for its shares (with the seller shares subsequently canceled); also called a stock swap merger.

Stock purchases The exchange of the target’s stock for either cash, debt, or the stock of the acquiring company.

Strategic buyer An acquirer primarily interested in increasing shareholder value by realizing long-term synergies.

Subsidiary carve-out A transaction in which the parent creates a wholly owned independent legal subsidiary, with stock and a management team different from the parent’s, and issues a portion of the subsidiary’s stock to the public.

Subsidiary merger A transaction in which the target becomes a subsidiary of the parent.

Supermajority rules A takeover defense requiring a higher level of approval for amending the charter or for certain types of transactions, such as a merger or acquisition.

Super voting stock A class of voting stock having voting rights many times those of other classes of stock.

Syndicate An arrangement in which a group of investment banks agrees to purchase a new issue of securities from the acquiring company for sale to the investing public.

Synergy The notion that the value of the combined enterprises will exceed the sum of their individual values.

Takeover Generic term referring to a change in the controlling ownership interest of a corporation.

Takeover defenses Protective devices put in place by a firm to frustrate, slow down, or raise the cost of a takeover.

Target company The firm that is being solicited by the acquiring company.

Taxable transaction Transactions in which the form of payment is primarily something other than acquiring company stock.

Tax considerations Structures and strategies determining whether a transaction is taxable or nontaxable to the seller’s shareholders.

Tax-free reorganization Nontaxable transactions usually involving mergers, with the form of payment primarily acquirer stock exchanged for the target’s stock or assets.

Tax-free transactions Transactions in which the form of payment is primarily acquiring company stock. Also called tax-free reorganizations.

Tax shield The reduction in the firm’s tax liability due to the tax deductibility of interest.

Technical insolvency A situation in which a firm is unable to pay its liabilities as they come due.

Tender offer The offer to buy shares in another firm, usually for cash, securities, or both.

Terminal growth value The discounted value of the cash flows generated during the stable growth period. Also called the sustainable, horizon, or continuing growth value.

Term loan A loan usually having a maturity of 2–10 years and secured by the asset being financed, such as new capital equipment.

Term sheet A document outlining the primary areas of agreement between the buyer and the seller, which is often used as the basis for a more detailed letter of intent.

Total capitalization The sum of a firm’s debt and all forms of equity.

Total consideration A commonly used term in legal documents to reflect the different types of remuneration received by target company shareholders.

Total purchase price The total consideration plus the market value of the target firm’s debt assumed by the acquiring company. Also referred to as enterprise value.

Tracking stocks Separate classes of common stock of the parent corporation whose dividend payouts depend on the financial performance of a specific subsidiary. Also called target or letter stocks.

Transfer taxes State taxes paid whenever titles to assets are transferred, as in an asset purchase.

Two-tiered offer A tender offer in which target shareholders receive an offer for a specific number of shares. Immediately following this offer, the bidder announces its intentions to purchase the remaining shares at a lower price or using something other than cash.

Type A reorganization A tax-free merger or consolidation in which target shareholders receive cash, voting or nonvoting common or preferred stock, or debt for their shares. At least 40% of the purchase price must be in acquirer stock.

Type B stock-for-stock reorganization A tax-free transaction in which the acquirer uses its voting common stock to purchase at least 80% of the voting power of the target’s outstanding voting stock and at least 80% of each class of nonvoting shares. Used as an alternative to a merger.

Type C stock-for-assets reorganization A tax-free transaction in which acquirer voting stock is used to purchase at least 80% of the fair market value of the target’s net assets.

Valuation cash flows Restated GAAP cash flows used for valuing a firm or a firm’s assets.

Variable growth valuation model A valuation method that assumes that a firm’s cash flows will experience periods of high growth followed by a period of slower, more sustainable growth.

Vertical merger One in which companies that do not own operations in each major segment of the value chain choose to backward integrate by acquiring a supplier or to forward integrate by acquiring a distributor.

Voluntary bankruptcy A situation in which the debtor firm files for bankruptcy.

Voluntary liquidation Sale by management, which concludes that the sale of the firm in parts could realize greater value than the value created by a continuation of the combined corporation.

Weighted-average cost of capital A broader measure than the cost of equity that represents the return that a firm must earn to induce investors to buy its stock and bonds.

White knight A potential acquirer that is viewed more favorably by a target firm’s management and board than the initial bidder.

Winner’s curse The tendency of the auction winners to show remorse, believing that they may have paid too much.

Zero-growth valuation model A valuation model that assumes that free cash flow is constant in perpetuity.