|Glossary to M&A
The purchase of the controlling interest or ownership of another company. This can be affected by:
- Agreement with the persons having majority of the stake
- Purchase of shares in the open market
- To make takeover offer to the general body of share holders
- Purchased of new shares by private treaty
- Acquisition of share capital
It is blending of two or more companies. The shareholders of each company would become the shareholders of the company which is undertaking the activity. It is similar to a merger.
Acquiree, Transferee, Victim, Offeree, Target Company: The Company which is being merged or taken over by the other company.
Acquisition of assets
Acquirer may purchase only assets or some specific assets and not all the assets and liabilities of the company.
Acquirer, Predator, Offeror, Corporate raider:
The company which is making a bid for the merger or takeover of another company
A recurring pattern of expansion and contraction in the economy. The average cycle is three to four years.
The net income "line" of the income statement
Term used to describe a company’s permanent capital, long-term debt and equity.
Capital Asset Pricing Model
An element of modern portfolio theory. A mathematical model showing an "appropriate" price, based on relative risk combined with the return on risk-free assets.
Measurement of the company’s debt component of the company’s capitalization. Measures the extent of debt used in relation to the company’s permanent capital. Determined by dividing long-term debt by long-term debt plus equity
Common Shares Outstanding
The number of common shares of stock outstanding at the end of the year, including stock held by the company in its treasury.
A security representing a share of ownership in a corporation.
Companies producing distinct products seek amalgamation to share common distribution and research facilities and promoting market enlargement. The acquiring company benefits by economies of resource sharing and diversification.
Clandestine Takeover (or) Creeping Takeover
The clause 40 of the Listing Agreement of stock exchange allows a person to buy up to 5% stake in a company without any prior permission. After 5%, they ought to inform the stock exchange.
The fusion of two companies in which both the companies loose their identity and form a new company. Share holders get the shares of the new company.
Term used in an income statement to denote recurring income as opposed to income generated by sales of assets or discontinued operations.
The price paid for a common stock that is obtained by converting either convertible bonds or preferred convertible stock
Provisions in the legal agreements on loans, bonds, or lines of credit. Usually written by the lender to protect its position as a creditor of the borrowers
Sec 23 of SEBI Takeover Regulations indicates that the company calls its precious assets as crown jewels to depict the greed of the acquirer under the takeover bid. These precious assets attract the raider to bid for the company’s control. The company sells these assets at its own initiative leaving the rest of the company intact. (Instead of selling the assets, the company may also lease them or mortgage them so that the attraction of free assets to the predator is suppressed.)
This can be made by any person within 21 days of public announcement of the offer made by the acquirer. This can be made by the public announcement and should be for the equal number of shares or more for which the first offer was made.
It is an amalgamation of the companies in two different industries, (Eg: DCM and Modi Industries.)
The directors of a threatened company may acquire another company for shares as a defensive measure to forestall the unwelcome takeover bid. For this purpose, they put large block of shares of their own company in the hands of shareholders of friendly company to make their own company least attractive for takeover bid.
Demerger or corporate split or division
This takes place when part of a company’s undertaking is transferred to a newly formed or an existing company. Some or that part of the shares of the first company are also transferred to the new company. The reminder of the first company’s undertaking continues to be vested in it and the share holders of the main company gets reduced by that extent.
Demerger by agreement
In this, the demerger takes place by an agreement with the shareholders and the creditors of the company. All the assets of the old company would be transferred to the new company and henceforth the new company would pay all the creditors.
The reduction of earnings, or the value of a stock, that can occur in a merger when more shares are issued; or with conversion of convertible securities into common stock.
Operations that have been or will be discontinued by the company. These items are reported separately on the income statement
They are sale, for cash or for securities, of a segment of a company to a third party which is an outsider.
Equity Carved Out
It is a type of divestiture and different to spin off. It resembles the IPO of some portion of equity stock of a wholly owned subsidiary by the parent company. Some of the subsidiary’s shares are offered for sale to general public for increasing cash inflow without losing control.
This is also called split off IPO.
The price at which an option may be exercised. This is also known as the strike price.
Mergers and acquisitions through the negotiations, willingness and consent of the acquiree company are called friendly mergers.
Golden Parachutes (or) First Class Passengers Strategy
This envisages a termination package for senior executives and is used as a protection tool against the takeover.
A large block of shares is held by an unfriendly company, which forces the target company to repurchase the stock at a substantial premium to prevent the takeover. (This could prove to be an expensive deal to the raider.)
A friendly party of the target company who seeks to takeover the predator.
The holding company would have more than 50% of the total voting power and has the control on the other company.
It is a merger of two competing firms, which are at same stage of industrial process.
An acquirer may not offer the proposal to acquire the target company’s undertaking, but may silently and unilaterally pursue efforts to gain controlling interest in it against the wishes of the management. They are also called raids or takeover raids.
House of Issue
The investment bank that underwrites and floats a security issue.
SEBI Regulations 1992, says that it is a criminal offence for an individual who is an insider by virtue of being connected with the company and has access to price sensitive information which other share holders do not have.
All intangible assets like goodwill, patents, trademarks, unamortized debt discounts and deferred charges
Interlocking shareholdings or Cross Shareholdings
Two or more group companies acquire shares of each other in large quantity or one company may distribute shares to the share holders of its group company to avoid threats of takeover bids. (If the interlocking of shareholdings is accompanied by joint voting agreement then the joint system of defence is termed as "Pyramiding", which is the safest device or defense.)
This is an agreement between two or more companies where there will be an agreed contribution and participation of the respective companies.
Joint Holding or Joint voting agreement
Two or more major shareholders may enter into agreement to block voting or to block sale of shares or may sell the shares together. This agreement is entered into with the cooperation of Offeree Company’s management.
A bond that involves greater than usual risk as an investment and pays a relatively high rate of interest, typically issued by a company lacking an established earnings history or having a questionable credit history. Junk bonds became a common means for raising business capital in the 1980s, when they were used to help finance the purchase of companies, especially by leverages buyouts.
Leveraged Buy outs
This is the acquisition of a company by its management personnel. It is also known as management buyout. Management may raise capital from the market or institutions to acquire the company on the strength of its assets.
The amount which is available if the assets of the business are sold off and converted to cash
Merger is the fusion of two or more companies (OR) Merger is a combination of two or more companies into a single company where, it survives and others loose the corporate identity. The survivor acquires the assets and liabilities of the rest.
They are the middle men in settling negotiations for merger or takeover between the offeree and offeror.
This bid is laid by the offeror when he has 30% or more and less than 50% of the voting rights of the offeree company and this should be in cash and the offer price should be the highest price, which offeror had paid in the past 12 months for that shares.
The target company attempts to takeover the hostile raider. This happens when the target company is larger than the predator.
A covenant allowing the bond holder to demand repayment in the event of a hostile takeover.
They take place when the agenda items at the meeting are likely to be opposed by dissident shareholders. Management of the company collect proxies to face these opponents in the meeting of Board of Directors.
When a bid is made for acquiring part of the shares of a class of capital where the offeror intends to obtain effective control. This is made for the equity shares.
The face value of a bond. Also, the arbitrary value given to the stock by the issuing company. This figure is relatively meaningless since the current value of a stock is its price established in the market, regardless of its stated par value.
The percentage of total assets that is tied up in land, buildings and equipment.
Quick (Asset) Ratio
A liquidity measure: cash plus cash equivalents plus trade receivables divided by total current liabilities. Also known as the acid test ratio. It is a more stringent measure of short-term liquidity than the current ratio because it excludes inventories from current assets (which presumes that current liabilities cannot be paid with inventory).
In this, a company transfers its undertaking and its assets to a new company in consideration of the issue of the new company’s shares to the first company’s members. And if the first company members debentures are not paid off, the new company should give the debentures to the respective holders and thus the first company would loose the identity.
The companies amend their Bye-Laws and regulations to be less attractive for the raider company. Such features are called Shark Repellents. The company may issue that 80-95% of the shareholders should approve for the takeover and 75% of the Board of Directors consent.
This occurs when equity shares of a subsidiary company are distributed to some of the parent company’s shareholders in exchange for their holdings in parent company.
It is s diversion of a company into two or more parts through transfer of stock and parent company ceases to exist.
It is a kind of a demerger where an existing parent company distributes on a pro-rata basis all the shares it owns in a controlled subsidiary to its own shareholders by which it gains effect to make two of the one company or corporation. There is no money transaction, subsidiary’s assets are not valued, transaction is not treated as stock dividend and tax free exchange. Both the companies exist and carry on business. It does not alter ownership proportion in any company.
Swallowing Poison Pills strategy
The target company might issue convertible securities which are converted into equity to deter the efforts of offeror and such conversion dilutes the bidder’s shares and discourages acquisition. Or the target company might raise borrowings distorting normal debt: equity ratio.
This is an exchange rate of the shares of the companies that would undergo a merger. This is calculated by the valuation of various assets and liabilities of the merging companies.
It is the intention of the acquirer reflected in the action of acquiring the shares of the Target company.
The acquirer pursues takeover (with out consent of the acquiree) by making a tender offer directly to shareholders of the target company to sell their shares. This offer is made for cash.
Eg: Tata Tea offer to shareholders of Continental Coffee Ltd in which more than 50% of the shareholders offered to Tata Tea.
This is similar to acquisition. Takeover differs with merger in approach to business combinations ie, the process of takeover, transaction involved, determination of share exchange. for ex: process of takeover is unilateral and the offeror company decides about the maximum price. Time taken in completion of the takeover is less than that in the merger.
This would give backward integration to the company to assimilate the sources of supply and forward integration towards the market. ie, the merging undertaking would be a buyer or a supplier using its product as intermediary material for final production.
Voluntary winding up
The original company which has split into several companies after division could be wound up voluntarily.
White knight enters the fray when the target company is raided by a hostile suitor. The clause 25 of SEBI Takeover regulations gives the provision to the White Knight to offer a higher price than the predator to avert the takeover bid. (With the higher bid offered by the white knight, the predator might not remain interested in acquisition and hence the target company is protected from the raid.)