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What is my business worth? This is the hardest question to answer for any business. Generally, when business owners think about the value of their businesses, especially if they are thinking about selling, there is an emotional driver that is usually quite different than the actual value. It is important to understand how market value is determined, how your records
Familiarize yourself with our terminology so you don’t get lost in the jargon!
An improvement in per share metrics post-transaction (after issuing additional shares).
The firm that is purchasing a company in an acquisition – the buyer.
The purchasing company acquires more than 50% of the shares of the acquired company and both companies survive.
The joining of one or more companies into a new entity. None of the combining companies remains; a completely new legal entity is formed.
The acquirer purchases only the assets of the target company (not its shares).
A company acquires a target that produces the raw material or the ancillaries which are used by the acquirer. It intends to ensure an uninterrupted supply of high-quality raw materials at a fair price.
One of the poor reasons to make a merger. If the target’s P/E ratio is lower than the acquirer’s P/E ratio, the EPS of the acquirer increases after the merger. However, it is purely an accounting/numerical phenomenon, and no value or synergies are created.
The portion of the purchase price given to the target in the form of cash.
One of the poor reasons to make a merger. Management compensation is according to company performance benchmarked to other companies, so an increase in the size of the company often means an increase in salary for management.
A merger of companies with seemingly unrelated businesses.
Underwriting fees charged by investment banks to issue debt in connection with the transaction.
A worsening of per share metrics post-transaction (after issuing additional shares).
Fixed costs decrease because merged companies can eliminate departments with repetitive functions.
A gain of more specialized skills or technology due to a merger.
One of the poor reasons to make a merger. Management decides to make a merger to increase the size of the company purely for the purpose of ego or prestige.
Underwriting fees charged by investment banks to issue equity in connection with the transaction.
The value of the purchase price over and above the net book value of assets (total purchase price minus the net book value of assets).
The increase or decrease in the net book value of assets to arrive at the fair market value.
The board of directors and management of the target company approve of the takeover. They will advise the shareholders to accept the offer.
A company acquires a target that either makes use of its products to manufacture finished goods or is a retail outlet for its products.
The number of shares a company has outstanding after options, convertible securities, etc., are exercised.
The excess purchase price over and above the target’s net identifiable assets (after fair value adjustments).
Merging of companies in the same lines of business. Usually to achieve synergies.
The board of directors and management of the target company do not approve of the takeover. They will advise the shareholders not to accept the offer.
An asset that can be assigned a fair value; can include both tangible and intangible assets.
The estimated value of a business using discounted cash flow analysis (often on a per share basis).
The purchasing company acquires all of the target company shares/assets; the target company ceases to exist (acquirer survives).
Book value of assets minus book value of liabilities.
The price offered per share by the acquirer.
This may include due diligence fees, legal fees, accounting fees, etc., related to the deal.
The number of shares outstanding after the transaction has closed and additional equity has been issued.
The breakdown of the total purchase price between net identifiable assets and goodwill.
Any fees or charges related to early debt repayments that are part of a restructuring.
Increases in revenue that are expected due to cross-selling, up-selling, pricing changes, etc.
A method of testing how sensitive certain outputs in a financial model are to changes in certain assumptions.
The offer price divided by the acquirer’s share price.
Any discount (if any) to the current market price that will be used to determine the number of shares the target receives.
The acquirer purchases all the shares of the target (and assumes all assets and liabilities).
The portion of the purchase price given to the target in the form of shares of the acquirer’s stock.
Acquirer completely takes over the target but preserves the target’s brand for the sake of brand reputation or customer base.
Cost savings and revenue enhancements that are expected to be achieved in connection with a merger/acquisition.
The percentage above the target’s current share price (or VWAP) the offer price represents.
The firm that is being acquired (the seller).
How long it is estimated to take to realize the synergies in the transaction.
The date on which the transaction is expected to be officially completed.
Merging with companies that are in a company’s supply chain; may be composed of both forward and backward integration.
Volume Weighted Average Price, often used in reference to the takeover premium (e.g., 15% above the 20-Day VWAP).
