Definition of 'Mergers And Acquisitions - M&A'

A general term used to refer to the consolidation of companies. A merger is a combination of two companies to form a new company, while an acquisition is the purchase of one company by another in which no new company is formed. Definition of 'Spinoff'

The creation of an independent company through the sale or distribution of new shares of an existing business/division of a parent company. A spinoff is a type of divestiture. Definition of 'Carve-Out'

Sometimes known as a partial spinoff, a carve out occurs when a parent company sells a minority (usually 20% or less) stake in a subsidiary for an IPO or rights offering.  Also, when an established brick-and-mortar company hooks up with venture investors and a new management team to launch an Internet spinoff.

Definition of 'Tracking Stock'

1. Common stock issued by a parent company that tracks the performance of a particular division without having claim on the assets of the division or the parent company. Also known as "designer stock".  2. A type of security specifically designed to mirror the performance of a larger index. Definition of 'Chief Executive Officer - CEO'

The highest ranking executive in a company whose main responsibilities include developing and implementing high-level strategies, making major corporate decisions, managing the overall operations and resources of a company, and acting as the main point of communication between the board of directors and the corporate operations. The CEO will often have a position on the board, and in some cases is even the chair. 

Definition of 'Target Firm'

A company which is the subject of a merger or acquisition attempt. A takeover attempt can take on many different flavors, depending on the attitude of the target firm toward the acquirer. If management and shareholders are in favor of the transaction, then a friendly and orderly transaction can take place. When there is opposition to the transaction, the target firm may attempt a variety of hostile actions hoping to thwart the takeover attempt. Definition of 'Board Of Directors - B Of D'

A group of individuals that are elected as, or elected to act as, representatives of the stockholders to establish corporate management related policies and to make decisions on major company issues. Such issues include the hiring/firing of executives, dividend policies, options policies and executive compensation. Every public company must have a board of directors. Definition of 'Shareholder'

Any person, company, or other institution that owns at least one share in a company.  A shareholder may also be referred to as a "stockholder." Definition of 'Synergy'

The idea that the value and performance of two companies combined will be greater than the sum of the separate individual parts. Definition of 'Economies Of Scale'

The increase in efficiency of production as the number of goods being produced increases. Typically, a company that achieves economies of scale lowers the average cost per unit through increased production since fixed costs are shared over an increased number of goods.   There are two types of economies of scale: -External economies - the cost per unit depends on the size of the industry, not the firm. -Internal economies - the cost per unit depends on size of the individual firm.

Definition of 'Discount'

The condition of the price of a bond that is lower than par. The discount equals the difference between the price paid for a security and the security's par value. Definition of 'Horizontal Merger'

A merger occurring between companies in the same industry. Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service. Horizontal mergers are common in industries with fewer firms, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. Definition of 'Vertical Merger'

A merger between two companies producing different goods or services for one specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry's supply chain, merge operations. Most often the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one. Definition of 'Conglomerate'

A corporation that is made up of a number of different, seemingly unrelated businesses. In a conglomerate, one company owns a controlling stake in a number of smaller companies, which conduct business separately. Each of a conglomerate's subsidiary businesses runs independently of the other business divisions, but the subsidiaries' management reports to senior management at the parent company. The largest conglomerates diversify business risk by participating in a number of different markets, although some conglomerates elect to participate in a single industry - for example, mining. Definition of 'Debt Financing'

When a firm raises money for working capital or capital expenditures by selling bonds, bills, or notes to individual and/or institutional investors. In return for lending the money, the individuals or institutions become creditors and receive a promise that the principal and interest on the debt will be repaid. Definition of 'Book Value'

1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated depreciation. 2. The net asset value of a company, calculated by total assets minus intangible assets (patents, goodwill) and liabilities.  3. The initial outlay for an investment. This number may be net or gross of expenses such as trading costs, sales taxes, service charges and so on.  Also known as "net book value (NBV)." In the U.K., book value is known as "net asset value."

Definition of 'Depreciation'

1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes. 

2. A decrease in an asset’s value caused by unfavorable market conditions.

Definition of 'Consolidation Phase'

A stage in the life of a company or an industry in which components in the company or industry start to merge to form fewer components. These components can include product lines at the company level or companies themselves at the industry level. The consolidation of companies differs from mergers in that consolidations create new entities while mergers do not. Definition of 'Liquidation'

1. When a business or firm is terminated or bankrupt, its assets are sold and the proceeds pay creditors. Any leftovers are distributed to shareholders.  2. Any transaction that offsets or closes out a long or short position.

Definition of 'Reverse Takeover - RTO'

A type of merger used by private companies to become publicly traded without resorting to an initial public offering. Initially, the private company buys enough shares to control a publicly traded company. The private company's shareholder then uses their shares in the private company to exchange for shares in the public company. At this point, the private company has effectively become a publicly traded one. Also known as a "reverse merger" or "reverse IPO"

Definition of 'Private Company'

A company whose ownership is private. As a result, it does not need to meet the strict Securities and Exchange Commission filing requirements of public companies. Definition of 'Public Company'

A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange or in the over the counter market. Although a small percentage of shares may be initially "floated" to the public, the act of becoming a public company allows the market to determine the value of the entire company through daily trading.   Public companies have inherent advantages over private companies, including the ability to sell future equity stakes and increased access to the debt markets.  With these advantages, however, comes increased regulatory scrutiny and less control for majority owners and company founders. 

Definition of 'Tender Offer'

An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the market price.

Definition of 'Outstanding Shares'

Stock currently held by investors, including restricted shares owned by the company's officers and insiders, as well as those held by the public. Shares that have been repurchased by the company are not considered outstanding stock.  Also referred to as "issued and outstanding" if all repurchased shares have been retired. Definition of 'Securities And Exchange Commission - SEC'

A government commission created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection, it also monitors the corporate takeovers in the U.S. The SEC is composed of five commissioners appointed by the U.S. President and approved by the Senate. The statutes administered by the SEC are designed to promote full public disclosure and to protect the investing public against fraudulent and manipulative practices in the securities markets. Generally, most issues of securities offered in interstate commerce, through the mail or on the internet must be registered with the SEC. Definition of 'Poison Pill'

A strategy used by corporations to discourage hostile takeovers. With a poison pill, the target company attempts to make its stock less attractive to the acquirer. There are two types of poison pills:  1. A "flip-in" allows existing shareholders (except the acquirer) to buy more shares at a discount.  2. A "flip-over" allows stockholders to buy the acquirer's shares at a discounted price after the merger. Definition of 'Dilution'

A reduction in earnings per share of common stock that occurs through the issuance of additional shares or the conversion of convertible securities. Definition of 'White Knight'

A company that makes a friendly takeover offer to a target company that is being faced with a hostile takeover from a separate party. Definition of 'Monopoly'

A situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products.  According to a strict academic definition, a monopoly is a market containing a single firm.   In such instances where a single firm holds monopoly power, the company will typically be forced to divest its assets. Antimonopoly regulation protects free markets from being dominated by a single entity.

Definition of 'De-Merger'

A business strategy in which a single business is broken into components, either to operate on their own, to be sold or to be dissolved. A de-merger allows a large company, such as a conglomerate, to split off its various brands to invite or prevent an acquisition, to raise capital by selling off components that are no longer part of the business's core product line, or to create separate legal entities to handle different operations. Definition of 'Employee Stock Option - ESO'

A stock option granted to specified employees of a company. ESOs carry the right, but not the obligation, to buy a certain amount of shares in the company at a predetermined price. An employee stock option is slightly different from a regular exchange-traded option because it is not generally traded on an exchange, and there is no put component. Furthermore, employees typically must wait a specified vesting period before being allowed to exercise the option.  Definition of 'Index'

A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it. Each index has its own calculation methodology and is usually expressed in terms of a change from a base value. Thus, the percentage change is more important than the actual numeric value.  Stock and bond market indexes are used to construct index mutual funds and exchange-traded funds (ETFs) whose portfolios mirror the components of the index. Definition of 'Research And Development - R&D'

Investigative activities that a business chooses to conduct with the intention of making a discovery that can either lead to the development of new products or procedures, or to improvement of existing products or procedures. Research and development is one of the means by which business can experience future growth by developing new products or processes to improve and expand their operations. Definition of 'Divestiture'

The partial or full disposal of an investment or asset through sale, exchange, closure or bankruptcy. Divestiture can be done slowly and systematically over a long period of time, or in large lots over a short time period. Definition of 'Undervalued'

A financial security or other type of investment that is selling for a price presumed to be below the investment's true intrinsic value. A undervalued stock can be evaluated by looking at the underlying company's financial statements and analyzing its fundamentals, such as cash flow, return on assets, profit retention and capital management, to determine said stock's intrinsic value. Definition of 'Raider'

An individual or organization that tries to take over a company by initiating a hostile takeover bid. Raiders look for companies with undervalued assets and then attempt a hostile takeover by purchasing enough shares to gain a controlling interest. The raider's objective is usually to generate huge profits in a reasonably short span of time, by breaking up the target company and selling off its assets, rather than attempting to turn its operations around and unlock value over the long haul.

Modern-day raiders prefer to go by the moniker "activist shareholders."

Definition of 'Initial Public Offering - IPO'

The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market. Also referred to as a "public offering."