Chapter 11: Mergers & Acquisitions

Merger

A transaction in which two companies combine into one new or continuing entity. In practice, the term is often used interchangeably with acquisition.

Acquisition

A transaction in which one company purchases another company, with the acquired company ceasing to exist as an independent entity.

Consideration

The form of payment made to target shareholders in an M&A transaction, typically cash, stock, or a combination of both.

Target Company

The company that is being acquired or sold in an M&A transaction.

Acquirer (Buyer)

The company or entity purchasing the target company.

Fiduciary Duty

The legal obligation of a board of directors to act in the best interests of shareholders, including maximizing shareholder value in a sale.

Target Management

Senior executives (CEO, CFO, etc.) who assist advisers by providing business insight, financial data, and strategic context.

Board of Directors

The governing body responsible for approving the transaction and ensuring fiduciary duties to shareholders are met.

Strategic Buyer

An acquirer operating in the same or a related industry, seeking long-term value through synergies such as cost savings or revenue growth.

Financial Sponsor (Financial Buyer)

An investor (e.g., private equity firm, hedge fund) seeking returns through cash flow generation, leverage, and a future exit.

Synergies

Cost savings or incremental revenue generated by combining two companies (e.g., economies of scale, shared technology).

Accretion/Dilution

A measure of whether a transaction increases (accretive) or decreases (dilutive) the acquirer’s earnings per share.

Sell-Side Adviser

The investment bank hired by the target to manage the sale process, conduct valuation, market the business, and negotiate terms.

Buy-Side Adviser

The investment bank hired by a potential acquirer to conduct due diligence, valuation, and financing analysis.

Engagement Letter

A contract between the target and its adviser outlining the scope of work and fee structure.

Due Diligence

The investigation and analysis of a target’s business, financials, legal matters, and operations by a prospective buyer.

Stapled Financing

Pre-arranged financing offered by the sell-side adviser to potential buyers to reduce execution risk and anchor valuation expectations.

Execution Risk

The risk that a deal fails due to inability to secure financing or complete required steps.

Equity Purchase (Stock Purchase)

An acquisition in which the buyer purchases the target’s stock and assumes all assets and liabilities.

Asset Purchase

An acquisition in which the buyer purchases specific assets (and selected liabilities), providing liability insulation and tax benefits.

Stepped-Up Basis

A tax benefit allowing acquired assets to be revalued to purchase price, increasing depreciation deductions.

Goodwill

The excess of purchase price over the fair value of identifiable net assets in a stock acquisition; not depreciable.

Section 338(h)(10) Election

An equity purchase treated as an asset sale for tax purposes, allowing a stepped-up basis; applicable to Subchapter S corporations.

Leveraged Buyout (LBO)

An acquisition financed primarily with debt, where the target’s cash flows service interest and principal payments.

Internal Rate of Return (IRR)

The discount rate that sets the net present value of all cash flows to zero; primary return metric in LBO analysis.

Dividend Recapitalization

A transaction in which a company borrows funds to pay a special dividend to equity holders, providing liquidity without dilution.

Exit Strategy

The method by which a financial sponsor realizes returns, such as an IPO, sale, or dividend recap.

Majority Recapitalization

A transaction where the owner sells a controlling stake while retaining minority ownership and management control.

Minority Recapitalization

An investment providing capital in exchange for a minority (20–49%) stake, with the owner retaining control.

Auction Process

A structured sale process designed to solicit bids from multiple buyers.

Broad Auction

A sale process involving many potential buyers to maximize competition and price.

Targeted Auction

A sale process involving a select group of buyers to preserve confidentiality and speed.

Negotiated Sale

A one-on-one sale process with a single buyer.

Teaser

A short (1–2 page) anonymous summary of the target used to generate initial buyer interest.

Confidentiality Agreement (CA / NDA)

A legal contract governing the use and protection of confidential information shared with buyers.

Standstill Agreement

A CA provision restricting bidders from acquiring shares or influencing control of a public target.

Non-Solicitation Clause

A CA provision preventing bidders from hiring the target’s employees for a specified period.

Clubbing Restriction

A CA provision limiting joint bids by multiple buyers to prevent collusion.

Confidential Information Memorandum (CIM)

A detailed (50–60 page) marketing document describing the target’s business, industry, and financials.

Initial Bid Procedures Letter

Instructions detailing how and when first-round bids must be submitted.

Indication of Interest (IOI)

A non-binding first-round bid expressing preliminary interest and valuation range.

Letter of Intent (LOI)

A non-binding expression of interest outlining proposed terms, subject to due diligence.

Management Presentation

A formal presentation by target management to shortlisted bidders during second-round due diligence.

Site Visit

An on-site tour of the target’s facilities to assess operations and assets.

Data Room

A secure repository of confidential documents used for buyer due diligence.

Final Bid Procedures Letter

Instructions for submitting binding final offers.

Final Bid

A binding offer including price, financing evidence, regulatory considerations, and marked-up definitive agreement.

Fairness Opinion

A valuation analysis provided to a board of directors opining on the financial fairness of a transaction.

Fairness Committee

An internal group within an investment bank that reviews and approves fairness opinions.

Balanced Review

A FINRA requirement that fairness committees include members not involved in the deal team.

Contingent Fee Disclosure

Disclosure of any advisory compensation dependent on deal completion.

Material Relationship Disclosure

Disclosure of any compensation-related relationships within the past two years between the adviser and transaction parties.

Independent Verification Disclosure

Disclosure of whether information relied upon was independently verified.

Insider Compensation Disclosure

Disclosure of whether fairness covers compensation paid to executives or insiders.

Golden Parachute

Contractual benefits paid to executives upon termination following a change in control.

IRC Section 280G

A tax rule disallowing deduction of excessive golden parachute payments and imposing a 20% excise tax.

Definitive Agreement (DA)

The binding contract outlining all terms of the M&A transaction.

Representations and Warranties

Statements by each party affirming accuracy of disclosed information.

Material Adverse Change (MAC / MAE)

A clause allowing termination if a significant negative event affects the target.

Indemnification

Seller protection reimbursing the buyer for post-closing losses from undisclosed liabilities.

Working Capital Peg

A mechanism adjusting purchase price based on actual working capital at closing.

Break-Up Fee

A penalty paid if a deal fails under specified circumstances.

No-Shop Clause

A provision prohibiting the target from seeking alternative bids.

Go-Shop Clause

A provision allowing the target to solicit competing bids after signing.

Hart-Scott-Rodino (HSR) Act

U.S. antitrust law requiring pre-merger notification and review by the DOJ and FTC.

Gun-Jumping

Prohibited coordination between merging firms before regulatory approval.

Bring-Down Due Diligence

Final confirmation that representations remain accurate before closing.

One-Step Merger

A merger requiring shareholder approval via proxy vote.

Two-Step Merger (Tender Offer)

A faster merger involving a tender offer followed by a squeeze-out.

Tender Offer

An offer to purchase shares directly from shareholders.

Squeeze-Out (Short-Form Merger)

A forced acquisition of remaining shares after reaching ownership threshold (typically 90%).

Proxy Statement (Schedule 14A)

A filing soliciting shareholder votes on a transaction.

PREM14A

Preliminary merger proxy filed at least 10 days before definitive proxy.

DEFM14A

Definitive merger proxy sent at least 20 days before shareholder vote.

Form S-4

Registration statement used to register securities issued in business combinations.

Regulation M-A

SEC regulation governing disclosures in M&A transactions.