Any deal where the bidder ends up with 50% or more of the target is called an acquisition. A Bidder is the entity that makes the purchase or the offer to purchase. The Target is the entity being purchased, or the entity in which a stake is being purchased. The Vendor is the entity that sells or disposes of the target entity.
A combination of management buy-out and buy-in where the team buying the business includes both existing management and new managers.
The generic name for a tradeable loan security issued by governments and companies as a means of raising capital. Government bonds are known as gilts or Treasury Stock.
A legal document which formalises the lender’s charge over the assets of the company.
This may include bank loans, overdrafts, and lease financing and may be long or short term, secured or unsecured. The lender receives interest at an agreed rate and in the event that this is not paid may be entitled to take control of and sell certain assets owned by the company. A lender does not, however, generally have a share in the ownership of the business.
Also known as expansion capital. This is venture capital financing used for expansion of an already established company.
This is one of the main processes which takes place before a transaction (e.g. MBO/MBI) is completed. The aim is to ensure that there is nothing which contradicts the financier’s understanding of the current state and potential of the business. The individual elements of due diligence may include commercial due diligence (markets, product and customers), a market report (marketing study), an accountants report (trading record, net asset and taxation position) and legal due diligence (implications of litigation, title to assets and intellectual property issues).
Earnings before interest and tax.
Earnings before interest, tax, depreciation and amortisation. EBITDA is measure of cash flow. By excluding interest, taxes, depreciation and amortisation the amount of money a company is bringing in can be clearly seen.
Equity is the term used to describe shares in a business conveying ownership of that business. The shareholders may be entitled to dividends. If a business fails, the shareholders will only receive a distribution on winding up after the lenders and creditors have been paid. An equity investment, therefore, has a higher risk attached to it than that facing a bank lender and thus the return that the shareholders demand on their money is typically higher. The most common source of equity finance for buy-outs is the venture capital market.
The point at which the institutional investors realise their investment. Venture capitalists may, depending on the business and their own situation, look to achieve an exit in anything from a few months to 10 years. Exits generally occur via trade sales, secondary management buy-outs and flotation on the stock market or by write-off if the investment ends in receivership.
The difference between the price which is paid for a business and the value of its assets.
HIGH YIELD (JUNK) BONDS
Bonds which offer high rates of interest but with correspondingly higher risk attached to the capital.
An institutional buy-out. This is when a private equity house acquires a business directly from the vendor. Often the target’s management will take a small stake.
Initial Public Offer. Shares in a company have been placed on a stock exchange. An IPO is always just the first time a company’s shares are listed – if a company has a listing on another market or in another country, then the listing is not an IPO, merely a secondary, or additional, listing.
Internal rate of return. The average annual compound rate of return received by an investor over the life of their investment. This is a key indicator used by institutions in appraising their investments.
Two or more companies that form a new venture.
Leveraged Buy-Out, an American term. The takeover of a company by investors who use the company’s own assets as collateral to raise the money which finances the bid. Normally the loans are then repaid either from the company’s cash flow, or by selling some of its assets.
Leveraged build up. A venture capital firm builds up the company it owns by acquiring smaller companies to amalgamate into the larger firm, thus increasing the total value of its investments through synergies between the acquired companies.
A form of vendor finance or deferred payment, in which the purchaser acts as a borrower, agreeing to make payments to the holder of the transferable loan note at a specified future date.
Management Buy-In. The company is sold to a combination of a new team of managers, with the new management team taking a majority stake. This often happens with family firms who have no one to pass the company on to, so they sell the company to a management team. The old owners sometimes retain a small stake. The management team often includes a venture capital firm, however, if the venture capital firm take a majority stake then the deal is classed as an IBO, rather than an MBI.
Management Buy-Out. This is the purchase of a business by its management, usually in co-operation with outside financiers. Buy-outs vary in size, scope and complexity but the key feature is that the managers acquire an equity interest in their business, sometimes a controlling stake, for a relatively modest personal . The existing owners sell most or usually all of their investment to the managers and their co-investors. If the outside financier (e.g. venture capital firm) takes a majority stake then the deal is not an MBO but rather an IBO.
A true merger is actually quite rare. Many acquisitions are described as mergers but in a true merger, there is a one-for-one share swap, for shares in the new company. If the swap is not on equal terms then this is an acquisition.
This is often used to bridge the gap between the secured debt a business can support, the available equity and the purchase price. Because of this, and because it normally ranks behind senior debt in priority of repayment, unsecured mezzanine debt commands a significantly higher rate of return than senior debt and often carries warrants (options to buy ordinary shares) to subscribe for ordinary shares. It ranks behind more formal borrowing contracts and is thus referred to as ‘subordinated’ or ‘intermediate debt’.
NET ASSET VALUE
This is the value of the company based on the valuation of the assets less any liabilities that it has in its balance sheet.
A new company formed to effect the buy-out by acquiring the operating subsidiaries.
Ordinary shareholders carry full rights to participate in the business through voting in general meetings. They are entitled to payment of a dividend out of profits and ultimately repayment of capital in the event of liquidation, but only after other claims have been met. As owners of the company the ordinary shareholders bear the greatest risk, but also enjoy the fruits of corporate success in the form of higher dividends and/or capital gains.
Profit before interest and tax.
The Price Earnings ratio is one of the most commonly used measures of value in financial circles. It expresses the value in terms of a multiple of profits. For any company quoted on the Stock Exchange this figure can be easily calculated and is published daily in the Financial Times.
These fall between debt and equity. They usually carry no voting rights and have preferential rights over ordinary shareholders regarding dividends and ultimate repayment of capital in the event of liquidation.
Private equity is an increasingly widely used term in Europe and is generally interchangeable with venture capital, but some commentators use it to refer only to the management buy-out and buy-in investment sector.
A government, council or other state-owned entity disposes of a company or stake in a company that it owns. The company, or part of the company, moves from public to private ownership.
Individual or group of individuals purchasing a majority stake in a publicly quoted company.
PUBLIC TO PRIVATE BUY-OUT
This involves the management or a private equity provider making an offer for the shares of a publicly quoted company, then taking the company private.
A mechanism whereby management’s equity stake may be increased (or decreased) on the occurrence of various future events, typically when the institutional investor’s returns exceed a particular target rate.
An unlisted company acquires a smaller listed company, thus achieving a stock market listing ‘through the back door’. The acquisition is carried out by the listed company issuing new shares in order to acquire the unlisted company. As the unlisted company is larger than the listed one, the bidder has to issue so many new shares that the owners of the unlisted company end up with a controlling stake in the listed company.
The management team in conjunction with a private equity funder acquire the business, allowing the existing private equity supplier to exit from its investment.
Most companies need more than the initial injection of capital, whether to enable them to expand into new markets, develop more production capacity, or to overcome temporary problems. There can be several rounds of financing.
Debt provided by a bank, usually secured and ranking ahead of other loans and borrowings in the event of a winding up.
Certificates or book entries representing ownership in a business.
Capital used to establish a company from scratch or within the first few months of its existence. Risky but with huge potential returns for the very successful.
Loans which rank after other debt. These loans will normally be repayable after other debt has been serviced and are thus more risky from the lender’s point of view. Mezzanine finance is an example of a subordinated loan.
Where an investment is too large, complex or risky, the lead investor may seek other financiers to share the investment. This process is known as syndication.
A common method of exit is a sale to a trade buyer. This can either allow management to withdraw from the business, or it may open up the prospect of working in a larger enterprise.
Can either be in the form of deferred loans from, or shares subscribed by, the vendor. The vendor may well take shares alongside the management in the new entity. This category of finance is generally used where the vendor’s expectation of the value of the business is higher than that of management and the institutions backing them.
Equity finance in an unquoted, and usually quite young, company to enable it to start up, expand or restructure its operations entirely. It’s cheaper than bank finance initially because paying dividends can be deferred; it also provides a strategic partner – but it implies handing over some control, a share of earnings and decisions over future sales.
WARRANTIES AND INDEMNITIES
Legal confirmation given by the seller, regarding matters such as tax or contingent liabilities, to assure the buyer that any undisclosed liabilities that subsequently come to light will be settled by the seller.