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Merger and Aquisition Glossary

August 28, 2002
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The following is a list of various merger and acquisition terms:

Acquisition--When a firm buys another firm.

Acquisition of Assets--A merger or consolidation in which an acquirerpurchases the selling firm’s assets.

Acquisition of Stock--A merger or consolidation in which an acquirerpurchases the acquiree’s stock.

Accounts Receivable Aging--A periodic report showing all outstandingreceivable balances, by customer, spread as to month due.

Agreement in Principle--An outline of the understanding between the parties,including the price and the major terms. Often referred to as a letter ofintent.

Announcement Date--Date on which particular news concerning a given companyis announced to the public.

Annuity--A regular periodic payment made by an insurance company to apolicyholder for a specified period of time.

Any--or--all Bid--Often used in risk arbitrage. Takeover bid where theacquirer offers to pay a set price for all outstanding shares of the TargetCompany, or any part thereof; contrasts with two-tier bid.

Assets Retained--Assets that an owner would keep after a merger oracquisition.

Asset Utilization Ratios--A group of ratios that measures the speed at whichthe firm is turning over or utilizing its assets.

Basket--Applies to derivative products. Group of stocks that is formed withthe intention of either being bought or sold all at once, usually to performindex arbitrage or hedging.

Bid Price--This is the quoted bid, or the highest price an investor iswilling to buy a security. Available price at which an investor can sell sharesof stock.

Book Cash--A firm’s cash balance as reported in its financial statements.

Brands--A symbol or name identifying suppliers of goods or services. The costassociated with establishing a brand are included in goodwill, and areamortizable for reporting but not for tax purposes.

Break-even Analysis--An analysis of the level of sales at which a projectwould make zero profit.

Business Broker or Intermediary--Professionals who arrange mergers,acquisitions, and various funding of companies with most of their transactionsin the under $1 million market. Business brokers or intermediaries do not havetheir own fund to invest.

Buyout--Purchase of a controlling interest or percent of shares of a company’sstock. A leveraged buyout is done with borrowed money.

Capital Gain--When a stock is sold for a profit, it’s the differencebetween the net sales price of securities and their net cost, or original basis.If the stock is sold below cost, the difference is a capital loss.

Capital Gains Distribution--Payments to mutual fund shareholders of profitsfrom the sale of securities in a fund’s portfolio.

Capitalization--The debt and/or equity mix that funds a firm’s assets.

Comebacks-Adjustments--Post-closing adjustments of any future stream ofpayments as a result of due diligence or post-closing negative discoveries, i.e.additional costs or payables, uncollectible notes, erroneous accruals.

Corporate Acquirer--A company seeking acquisitions that provide more than theprofits and cash flow of the acquisition target and may include the desire toacquire operational economies, additional market share, technology, or someother synergy.

Deal Structure--The nature of the fee paid by the acquiring entity in amerger transaction. Typical deal structure may include stock or other valuablesbesides cash. The complex nature of deal structure is an important reason whymiddle market intermediaries are often hired.

Due Diligence--In the process of an acquisition, the acquiring firm is oftenallowed to see the target firm’s internal books. The acquiring firm does aninternal audit. Offers are made contingent upon the resolution of the duediligence process.

EBITDA--Earnings before interest, taxes, depreciation, and amortization.

Enterprise-Wide Integration--A disciplined project management approach whereone infrastructure coordinates integration efforts and communications to allfunctional departments and business units simultaneously.

Flipping--The sale of a company within a year or two of its being bought.

HR Financial Due Diligence--Investigative stage of an M&A assessing HRfinancial risks, liabilities, and plan structures of compensation, benefits, andpension plans.

Human Capital Due Diligence--Investigative stage of an M&A assessingHuman Capital aspects including culture, organizational structure, performancemanagement, and workforce-development approaches.

Human Capital Integration--M&A stage that integrates HR processes andpolicies and enables HR to support human-capital aspects (i.e. communication,training, retention, etc.) of integration across the enterprise.

In Play--Company that has become the target of a takeover, and whose stockhas become a speculative issue.

Integration--The combination of two or more firms to form a new entity.

Joint Venture--A venture by partnership or conglomerate designed to sharerisk or expertise.

Merger--Acquisition in which all assets and liabilities are absorbed by thebuyer. More generally, any combination of two companies.

Merger Premium--The part of a buyout or exchange offer which represents avalue over and above the market value of the acquired firm.

Non-Binding--Directs that the parties to that particular agreement are notbound or exclusively committed by its provisions.

Non-Compete--Directs that the signing party will not engage in anyactivities that compete with the organization being departed from.

Ongoing M&A Capabilities--An established set of an organization’sM&A competencies set in a replicable process to increase success in allfuture M&As.

Optimal Portfolio--An efficient portfolio most preferred by an investorbecause its risk/reward characteristics approximate the investor’s utilityfunction. A portfolio that maximizes an investor’s preferences with respect toreturns and risk.

PLC--Designation of British public limited company equivalent to U.S. publiccompany.

Pooling of Interests--An accounting method for reporting acquisitionsaccomplished through the use of equity. The combined assets of the merged entityare consolidated using book value, as opposed to the purchase method, which usesmarket value. The merging entities’ financial results are combined as thoughthe two entities have always been a single entity.

Post-Closing--Conditions or events that are activated after a transaction isfinalized.

Purchase Method--Accounting for an acquisition using market value for theconsolidation of the two entities’ net assets on the balance sheet.

Pure Play--An acquired company that is in only one business.

Required Rate of Return--That rate of return that investors demand from aninvestment (securities) to compensate them for the amount of risk involved.

Restructuring--Redeploying the asset and liability structure of the firm.This can be accomplished through repurchasing shares with cash or borrowedfunds, acquiring other firms, or selling off unprofitable or unwanted divisions.

Seamless Transition--Describes the most advantageous method of completing allthe necessary tasks to absorb and manage all the operational, financial, andorganizational aspects of an acquisition.

Selling Memorandum--A description of the business including its history,products, markets, management, facilities, competition, financial statements,product literature, and a review of its prospects.

Strategic Acquisition--The purchase of an operating business that supplementsthe buyer’s strengths or complements the buyer’s weakness matrix.

Synergy--The feature of a system whereby, when the parts are properlyinterrelated and functioning, an output is achieved that is greater than orsuperior to the effects obtained when the parts function independently.

SOURCE: Reprinted with permission from “Best Practices in Mergers andAcquisitions,” Watson Wyatt Data Services. For more information, visit www.wwdssurveys.com or call 201/843--1177

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