Hello TCLA family! I’ve listed below a non-exhaustive list of M&A terms/definitions that should help out with interviews. As this becomes a hotter topic for law firm case studies, we hope you find this useful.
- Merger: When two companies join to form a single new entity, usually to expand their customer base, reduce costs, and increase market share. It’s like you and a friend bringing together two toys to make an even better, more valuable toy.
- Acquisition: When one company buys another, with the acquiring company taking control of the target company’s operations, assets, and liabilities. In the example above, it’s like you asking your friend for the right to own their toy, if you give them some money for it.
- Synergy: When the value of a combined company is greater than the sum of its individual parts. There was a very thorough way @Jaysen had explained it on TCLAs instagram page a while back, and it has stuck with me ever since; using the 2+2=5 mechanism, the 1 represents the added value from the M&A activity, whether cost reduction (cost synergy) or revenue enhancement (revenue synergy). These could be through strategic hiring, employing the latest technology, etc.
- Due Diligence: A thorough investigation by the buyer to check if the target company is healthy, legal, and worth buying. It’s like looking closely at a toy before buying it to make sure it doesn’t have any defects.
- Deal Structure: The way a transaction is set up, such as asset purchase, share purchase, or merger. Deciding if you want to buy just some parts of the toy, all of it, or combine your toy with someone else’s to make a bigger one.
- SPA (Share Purchase Agreement): A contract that states the rules for buying and selling shares in a company. It’s like making a promise with a friend to buy their share of a toy, so you own more of it.
- APA (Asset Purchase Agreement): A contract where some assets are sold, not the entire company. Like buying just the wheels and headlights of a toy car, instead of the whole toy. It’s like a cherry picking game.
- Representations and Warranties: Statements the seller makes about the company to reassure the buyer about its condition. It’s like your friend saying, “I promise my toy is not broken, and it has all its parts intact.”
- Indemnities: A clause to protect the buyer by making the seller pay for specific problems if they arise. Like saying, “If this toy breaks tomorrow, you have to give me my money back.”
- Earn-Out: Part of the payment is made later, based on the company’s future performance. If the toy works really well and doesn’t break, I’ll give you an extra juice box later!
- Escrow: Money held by a third party to ensure all promises are kept after the deal. Like giving your candy to a grown-up until you and your friend keep your promises.
- Completion/Closing: The moment when ownership of the company officially changes hands. When you finally swap toys and they’re all yours!
- Conditions Precedent: Specific requirements that must be met before the deal can close. You can only get the toy if you clean your room first, just like the rules your parents set.
- Break Fee/Reverse Break Fee: A fee paid if one side backs out of the deal without a good reason. If you say you’ll swap toys but change your mind, you have to give your friend some of your candy.
- Material Adverse Change (MAC) Clause: A clause letting the buyer cancel the deal if something seriously bad happens to the company. If your friend’s toy suddenly breaks before you swap, you don’t have to take it anymore.
- Drag-Along and Tag-Along Rights: Drag-Along lets majority shareholders force a sale; Tag-Along lets minority shareholders join the sale. If your big brother sells his toy, you can make your little sister sell hers too (Drag-Along), or she can choose to join in (Tag-Along).
- Locked Box Mechanism: Purchase price is set at a historical date, and no value is allowed to leave the company afterward. Agreeing on the toy’s price based on how it looked a week ago, with no changes since.
- Post-Closing Adjustments: Adjustments made to the purchase price after the deal closes to show certain changes. If you see later that the toy’s lights are missing, you ask your friend to return some of your candy.
- Non-Disclosure Agreement (NDA): An agreement to keep shared information confidential during the deal process. It’s like making a promise to keep a secret and not tell anyone.
- Non-Compete Agreement: An agreement preventing the seller from starting a competing business post-transaction. After selling your toy car, you promise not to start making new ones and competing with your friend.
- Anti-Trust/Competition Clearance: Approval needed to make sure the deal doesn’t reduce market competition. Making sure you don’t have ALL the toys, so other kids still have some to play with. A Competition practice in a law firm will oversee these aspects of an M&A deal.
