Investment Banking Terms

M&A Technical Terms

Accretion

when an acquisition increases the buyer's earnings per share (EPS)

what’s the formula for WACC?

(Cost of equity % equity) + (cost of debt % of debt) * (1-tax rate)

What is investment banking?

Two main services they provide:

1. Mergers and acquisitions

2. Raising capital

What is working capital?

Working capital is the liquidity of the business to fund short term debt obligations

What is Operating working capital (OWC)

capital tied up in a company's core business activities and its ability to manage operational cash flow

What is the working capital formula?

Current Assets - Current Liabilities

What is the formula for Operating working capital

Current Operating Assets - Current Operating Liabilities

What are the 3 financial statements

Income statement, cash flow statement and balance sheet

How are the three financial statements—the Income Statement, Balance Sheet, and Cash Flow Statement—linked?

The three financial statements are interconnected as follows:

1. The Income Statement's net income flows into the Cash Flow Statement (as the starting point for operating activities in the indirect method) and also impacts the Balance Sheet via retained earnings.
2. The Cash Flow Statement's ending cash balance is reported as a current asset on the Balance Sheet.
3. Changes in non-cash items on the Balance Sheet (e.g., accounts

Dilution

when an acquisition decreases the buyer's earnings per share (EPS)

DCF (Discounted Cash Flow)

a valuation method using projected future cash flows and discounting them back to present value using WACC

Buy-Side

when an advisor helps a buyer evaluate and acquire a businessSell-Side

Free Cash Flow (FCF)

cash a business generates after paying for operating expenses and capital expenditures

WACC (Weighted Average Cost of Capital)

the average rate a company is expected to pay to finance its assets

Terminal Value

the estimated value of a business at the end of a DCF forecast period

EBITDA

earnings before interest

Enterprise Value (EV)

total value of a business including debt and excluding cash

Comparable Company Analysis

valuing a company using trading multiples of similar public companies (e.g.

Precedent Transactions

valuing a company based on what similar companies were acquired for in past deals

CIM (Confidential Information Memorandum)

a document used in sell-side M&A to market the company and share its financial and operational details with buyers

LOI (Letter of Intent)

a non-binding agreement outlining the key terms of a potential deal

Due Diligence

the process where a buyer reviews the seller's financials and find any risks.

Investigate Assets and Liabilities

SDE (Seller's Discretionary Earnings)

EBITDA plus owner's salary and personal expenses

Working Capital

current assets minus current liabilities

Earn-Out

a portion of the purchase price that the seller earns only if the business hits certain performance goals after the sale

Valuation Multiple

a ratio like EV/EBITDA or Price/Earnings that helps value a company relative to its earnings or revenue

Asset Purchase

when the buyer only buys selected assets of the company

Indication of Interest (IOI)

a non-binding note showing interest in buying a business before a full LOI is sent

Cap Table (Capitalization Table)

a breakdown of a company’s ownership — including founders

Teaser

A short summary sent to potential buyers with basic details about the company, without revealing its name

The calculated amount is $22,500

22,500

Whats 15% of %150,000?

Management Presentation

a meeting where the seller's leadership team presents the business to potential buyers after initial interest

Synergies

cost savings or revenue increases expected from combining two companies in a merger

Bridge Loan

short-term financing used to cover immediate cash needs until permanent funding is available

Leveraged Buyout (LBO)

when a company is purchased using a large amount of debt, where the acquired company’s cash flow is used to repay the loan

Confidentiality Agreement (NDA)

NDA

a legal agreement to keep information private, often signed before receiving a CIM

Capital Expenditures (CapEx)

money spent on acquiring or upgrading physical assets like equipment or property

Net Debt

total debt minus cash, used in calculating Enterprise Value

Escrow

a portion of the purchase price held temporarily to cover potential post-sale claims or adjustments

Drag-Along Rights

gives majority shareholders the power to force minority shareholders to join in the sale of the company

Tag-Along Rights

gives minority shareholders the right to join a deal if the majority shareholders sell their stake

Working Capital Adjustment

adjusts purchase price post-closing if actual working capital is above or below a target level

Breakup Fee

a penalty paid by a company if it backs out of a deal after signing an agreement

Basket

a minimum threshold of damages required before a seller must pay under a rep & warranty breach in M&A

MAC Clause (Material Adverse Change)

allows a buyer to walk away from a deal if a major negative event occurs at the target company before closing

Sell-Side M&A Process

Preparation, Marketing, Due Diligence, Negotiation, Closing

Black Knight

a company that makes an unsolicited and hostile takeover bid for another company

Horizontal Integration

Merging of companies in the same lines of business. Usually to achieve synergies.

Intrinsic Value

The estimated value of a business using discounted cash flow analysis (often on a per share basis).

Sensitivity Analysis

A method of testing how sensitive certain outputs in a financial model are to changes in certain assumptions.

Subsidiary

Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.

Takeover Premium

The percentage above the target’s current share price (or VWAP) the offer price represents.

Godfather Offer

Acquirer presents an attractive takeover that the target company cannot refuse. A godfather offer does not have negative implications that are usually associated with this type of takeover offer, including a change of the management team, asset stripping, or transfer of reserves.

What is Mergers and Acquisitions?

combine two companies into one new, separate entity. 

one company (the acquirer) purchases and absorbs another company. 

Bulge Bracket Firms

Goldman Sachs, JPMorgan, Morgan Stanley, etc.

What are some potential reasons that a company might acquire another company?

• Revenue and Cost Synergies

• Upselling/Cross-Selling Opportunities

• Proprietary Assets Ownership (Intellectual Property, Patents, Copyright)

• Talent-Driven Acquisitions (“Acqui-Hire”)

• Expanded Geographic Reach and Customers

• Enter New Markets to Sell Products/Services

• Revenue Diversification and Less Risk

• Horizontal Integration (i.e. Market Leadership and Less Competition)

• Vertical Integration (i.e. Supply Chain Efficiencies)

All-Cash Deal

paid for using all cash, there is an immediate tax consequence because a taxable event has been triggered.

All-Equity Deal

all-equity and shares in the newly merged company were exchanged, there is no taxable event triggered until the shares are later sold at a capital gain.

Revenue Synergies

assume the combined entity can generate more cash flows than if the cash flows produced on an individual basis were added together.

Cost Synergies

entail corporate actions such as cost-cutting, consolidating overlapping functions, closing down unnecessary locations, and eliminating redundancies in employee roles.

sale process

Broad Auction, Targeted Auction, Negotiated Sale

Total PV of Cash Flows = $4,008,173.93

A company, "Tech Innovators," is considering a new product launch and wants to evaluate its potential using a DCF model. They project the following Free Cash Flows (FCF) for the next 4 years:

• Year 1: $800,000

• Year 2: $1,200,000

• Year 3: $1,500,000

• Year 4: $1,700,000 

Tech Innovators' Weighted Average Cost of Capital (WACC) is 10%

Calculate the Present Value (PV) of these projected cash flows for Tech Innovators

CRM (Customer Relationship Management)

software used to manage relationships with clients and track buyer/seller communication during the deal process

Buyer List

a targeted list of potential buyers created by brokers to market a business in a sell-side process

Teaser Campaign

when a broker sends out teaser documents to potential buyers to gauge interest before sending a CIM

Data Room

a secure online folder where all financial, legal, and operational information is stored (Google Drive, Cloud, etc)

Deal Pipeline

a tracking system used by M&A brokers to monitor where each deal is in the sales process (e.g.

Owner Add-Backs

discretionary expenses or one-time costs added back to earnings to normalize profitability for valuation

Listing Price

the asking price for a business

Trailing Twelve Months (TTM)

a financial performance measure based on the most recent 12 months of data

NDA Tracking

the process of recording which buyers have signed NDAs and received CIMs

Buyer Fit

how well a buyer matches the seller’s goals

Deal Fatigue

when one or both parties in a transaction lose motivation due to extended negotiations or delays

Three Financal Statements

Income Statement, Balance Sheet, Cash Flow Statement

if its expected future cash flows increase, its expected future cash flows start to grow at a faster rate, or the Discount Rate decreases (e.g., because the expected returns of similar companies decrease).

What might cause a company’s Present Value (PV) to increase or decrease?

What is Present Value (PV)

the current worth of a future sum of money or cash flow, considering the potential for earning a return if that money were invested today

Time Value of Money

A dollar today is worth more than a dollar in the future due to the potential for that dollar to earn interest or returns. 

Present Value Formula

Present Value

PV

FutureValue / (1 + r)^n,

PV ≈ $$11,208.99

11,208.99

You are promised a future payment of $15,000 in 5 years.

If you could earn a return of 6% per year on your investments, what is the Present Value of that future payment?

What is Sellers Discretionary Earnings? (SDE)

Adjusts the net profit by adding back discretionary expenses