Definition of M&A

M&A

Abbreviation for mergers and acquisitions.

Accelerated cost recovery system (ACRS)

Schedule of depreciation rates allowed for tax purposes.

Long-term assets

Value of property, equipment and other capital assets minus the depreciation. This is an
entry in the bookkeeping records of a company, usually on a "cost" basis and thus does not necessarily reflect
the market value of the assets.

Risk premium approach

The most common approach for tactical asset allocation to determine the relative
valuation of asset classes based on expected returns.

Tax Reform Act of 1986

A 1986 law involving a major overhaul of the U.S. tax code.

Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRIRA)

A federal Act shielding employers from liability if they have made
a good-faith effort to verify a new employee’s identity and employment eligibility.

Immigration Reform and Control Act of 1986

A federal Act requiring all employers having at least four employees to verify the identity and employment
eligibility of all regular, temporary, casual, and student employees.

ABM (automated banking machine)

A bank machine, sometimes referred to as an automated teller machine (ATM).

CARs (cumulative abnormal returns)

a measure used in academic finance articles to measure the excess returns an investor would have received over a particular time period if he or she were invested in a particular stock.
This is typically used in control and takeover studies, where stockholders are paid a premium for being taken over. Starting some time period before the takeover (often five days before the first announced bid, but sometimes a longer period), the researchers calculate the actual daily stock returns for the target firm and subtract out the expected market returns (usually calculated using the firm’s beta and applying it to overall market movements during the time period under observation).
The excess actual return over the capital asset pricing model-determined expected return market is called an ‘‘abnormal return.’’ The cumulation of the daily abnormal returns over the time period under observation is the CAR. The term CAR(-5, 0) means the CAR calculated from five days before the
announcement to the day of announcement. The CAR(-1, 0) is a control premium, although Mergerstat generally uses the stock price five days before announcement rather than one day before announcement as the denominator in its control premium calculation. However, the CAR for any period other than (-1, 0) is not mathematically equivalent to a control premium.

DLOC (discount for lack of control)

an amount or percentage deducted from a pro rata share of the value of 100% of an equity interest in a business, to reflect the absence of some or all of the powers of control.

DLOM (discount for lack of marketability)

an amount or percentage deducted from an equity interest to reflect lack of marketability.

Accounting earnings

Earnings of a firm as reported on its income statement.

Asset-based financing

Methods of financing in which lenders and equity investors look principally to the
cash flow from a particular asset or set of assets for a return on, and the return of, their financing.

Banker's acceptance

A short-term credit investment created by a non-financial firm and guaranteed by a
bank as to payment. Acceptances are traded at discounts from face value in the secondary market. These
instruments have been a popular investment for money market funds. They are commonly used in
international transactions.

Best-efforts sale

A method of securities distribution/ underwriting in which the securities firm agrees to sell
as much of the offering as possible and return any unsold shares to the issuer. As opposed to a guaranteed or
fixed price sale, where the underwriter agrees to sell a specific number of shares (with the securities firm
holding any unsold shares in its own account if necessary).

Big Bang

The term applied to the liberalization in 1986 of the London Stock Exchange in which trading was
automated with the use of computers.

Bond equivalent yield

Bond yield calculated on an annual percentage rate method. Differs from annual
effective yield.

Capital asset pricing model (CAPM)

An economic theory that describes the relationship between risk and
expected return, and serves as a model for the pricing of risky securities. The CAPM asserts that the only risk
that is priced by rational investors is systematic risk, because that risk cannot be eliminated by diversification.
The CAPM says that the expected return of a security or a portfolio is equal to the rate on a risk-free security
plus a risk premium.

Capital expenditures

Amount used during a particular period to acquire or improve long-term assets such as
property, plant or equipment.

Cash commodity

The actual physical commodity, as distinguished from a futures contract.

Cash conversion cycle

The length of time between a firm's purchase of inventory and the receipt of cash
from accounts receivable.

Chicago Mercantile Exchange (CME)

A not-for-profit corporation owned by its members. Its primary
functions are to provide a location for trading futures and options, collect and disseminate market information,
maintain a clearing mechanism and enforce trading rules.

Consolidation

The combining of two or more firms to form an entirely new entity.

Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.

Cramdown

The ability of the bankruptcy court to confirm a plan of reorganization over the objections of
some classes of creditors.

Credit scoring

A statistical technique wherein several financial characteristics are combined to form a single
score to represent a customer's creditworthiness.

Dealer loan

Overnight, collateralized loan made to a dealer financing his position by borrowing from a
money market bank.

Depreciation

A non-cash expense that provides a source of free cash flow. Amount allocated during the
period to amortize the cost of acquiring Long term assets over the useful life of the assets.

Disintermediation

Withdrawal of funds from a financial institution in order to invest them directly.

Documented discount notes

Commercial paper backed by normal bank lines plus a letter of credit from a
bank stating that it will pay off the paper at maturity if the borrower does not. Such paper is also referred to as
LOC (letter of credit) paper.

Dollar-weighted rate of return

Also called the internal rate of return, the interest rate that will make the
present value of the cash flows from all the subperiods in the evaluation period plus the terminal market value
of the portfolio equal to the initial market value of the portfolio.

Embedded option

An option that is part of the structure of a bond that provides either the bondholder or
issuer the right to take some action against the other party, as opposed to a bare option, which trades
separately from any underlying security.

Equivalent loan

Given the after-tax stream associated with a lease, the maximum amount of conventional
debt that the same period-by-period after-tax debt service stream is capable of supporting.

Five Cs of credit

Five characteristics that are used to form a judgement about a customer's creditworthiness:
character, capacity, capital, collateral, and conditions.

Foreign exchange

Currency from another country.

Foreign Sales Corporation (FSC)

A special type of corporation created by the Tax Reform Act of 1984 that
is designed to provide a tax incentive for exporting U.S.-produced goods.

Future investment opportunities

The options to identify additional, more valuable investment opportunities
in the future that result from a current opportunity or operation.

Futures contract

Agreement to buy or sell a set number of shares of a specific stock in a designated future
month at a price agreed upon by the buyer and seller. The contracts themselves are often traded on the futures
market. A futures contract differs from an option because an option is the right to buy or sell, whereas a
futures contract is the promise to actually make a transaction. A future is part of a class of securities called
derivatives, so named because such securities derive their value from the worth of an underlying investment.

Geographic risk

Risk that arises when an issuer has policies concentrated within certain geographic areas,
such as the risk of damage from a hurricane or an earthquake.

Gestation repo

A reverse repurchase agreement between mortgage firms and securities dealers. Under the
agreement, the firm sells federal agency-guaranteed MBS and simultaneously agrees to repurchase them at a
future date at a fixed price.

GNMA-II

Mortgage-backed securities (MBS) on which registered holders receive an aggregate principal and
interest payment from a central paying agent on all of their certificates. Principal and interest payments are
disbursed on the 20th day of the month. GNMA-II MBS are backed by multiple-issuer pools or custom pools
(one issuer but different interest rates that may vary within one percentage point). Multiple-issuer pools are
known as "Jumbos." Jumbo pools are generally longer and offer certain mortgages that are more
geographically diverse than single-issuer pools. Jumbo pool mortgage interest rates may vary within one
percentage point.

GNMA Midget

A GNMA pass-through certificate backed by fixed rate mortgages with a 15 year maturity.
GNMA Midget is a dealer term and is not used by GNMA in the formal description of its programs.

Go-around

When the Fed offers to buy securities, to sell securities, to do repo, or to do reverses, it solicits
competitive bids or offers from all primary dealers.

Gold standard

An international monetary system in which currencies are defined in terms of their gold
content and payment imbalances between countries are settled in gold. It was in effect from about 1870-1914.

Graham-Harvey Measure 1

Performance measure invented by John Graham and Campbell Harvey. The
idea is to lever a fund's portfolio to exactly match the volatility of the S and P 500. The difference between the
fund's levered return and the S&P 500 return is the performance measure.

Graham-Harvey Measure 2

Performance measure invented by John Graham and Campbell Harvey. The
idea is to lever the S&P 500 portfolio to exactly match the volatility of the fund. The difference between the
fund's return and the levered S&P 500 return is the performance measure.

Income beneficiary

One who receives income from a trust.

Interest-only strip (IO)

A security based solely on the interest payments form a pool of mortgages, Treasury
bonds, or other bonds. Once the principal on the mortgages or bonds has been repaid, interest payments stop
and the value of the IO falls to zero.

Interest rate agreement

An agreement whereby one party, for an upfront premium, agrees to compensate the
other at specific time periods if a designated interest rate (the reference rate) is different from a predetermined
level (the strike rate).

Investment bank

Financial intermediaries who perform a variety of services, including aiding in the sale of
securities, facilitating mergers and other corporate reorganizations, acting as brokers to both individual and
institutional clients, and trading for their own accounts. Underwriters.

Investment income

The revenue from a portfolio of invested assets.
Investment management Also called portfolio management and money management, the process of
managing money.

Lessee

An entity that leases an asset from another entity.

Liquidation value

Net amount that could be realized by selling the assets of a firm after paying the debt.

Lockbox

A collection and processing service provided to firms by banks, which collect payments from a
dedicated postal box that the firm directs its customers to send payment to. The banks make several
collections per day, process the payments immediately, and deposit the funds into the firm's bank account.

Look-thru

A method for calculating U.S. taxes owed on income from controlled foreign corporations that
was introduced by the Tax Reform Act of 1986.

Margin

This allows investors to buy securities by borrowing money from a broker. The margin is the
difference between the market value of a stock and the loan a broker makes. Related: security deposit (initial).

Market prices

The amount of money that a willing buyer pays to acquire something from a willing seller,
when a buyer and seller are independent and when such an exchange is motivated by only commercial
consideration.

Maximum price fluctuation

The maximum amount the contract price can change, up or down, during one
trading session, as fixed by exchange rules in the contract specification. Related: limit price.

Minimum purchases

For mutual funds, the amount required to open a new account (Minimum Initial
Purchase) or to deposit into an existing account (Minimum Additional Purchase). These minimums may be
lowered for buyers participating in an automatic purchase plan

Mortgage pass-through security

Also called a passthrough, a security created when one or more mortgage
holders form a collection (pool) of mortgages sells shares or participation certificates in the pool. The cash
flow from the collateral pool is "passed through" to the security holder as monthly payments of principal,
interest, and prepayments. This is the predominant type of MBS traded in the secondary market.

Municipal notes

Short-term notes issued by municipalities in anticipation of tax receipts, proceeds from a
bond issue, or other revenues.

Net advantage of refunding

The net present value of the savings from a refunding.

Opportunity set

The possible expected return and standard deviation pairs of all portfolios that can be
constructed from a given set of assets.

Pay-up

The loss of cash resulting from a swap into higher price bonds or the need/willingness of a bank or
other borrower to pay a higher rate of interest to get funds.

Planned capital expenditure program

Capital expenditure program as outlined in the corporate financial plan.

Planned financing program

Program of short-term and long-term financing as outlined in the corporate
financial plan.

Poison pill

Anit-takeover device that gives a prospective acquiree's shareholders the right to buy shares of the
firm or shares of anyone who acquires the firm at a deep discount to their fair market value. Named after the
cyanide pill that secret agents are instructed to swallow if capture is imminent.

Policy asset allocation

A long-term asset allocation method, in which the investor seeks to assess an
appropriate long-term "normal" asset mix that represents an ideal blend of controlled risk and enhanced
return.

Portfolio opportunity set

The expected return/standard deviation pairs of all portfolios that can be
constructed from a given set of assets.

Position diagram

Diagram showing the possible payoffs from a derivative investment.

Program trading

Trades based on signals from computer programs, usually entered directly from the trader's
computer to the market's computer system and executed automatically.

Real assets

Identifiable assets, such as buildings, equipment, patents, and trademarks, as distinguished from a
financial obligation.

Recourse

Term describing a type of loan. If a loan is with recourse, the lender has a general claim against the
parent company if the collateral is insufficient to repay the debt.

Registered bond

A bond whose issuer records ownership and interest payments. Differs from a bearer bond
which is traded without record of ownership and whose possession is the only evidence of ownership.

Residual method

A method of allocating the purchase price for the acquisition of another firm among the
acquired assets.

Revenue fund

A fund accounting for all revenues from an enterprise financed by a municipal revenue bond.

Revolving credit agreement

A legal commitment wherein a bank promises to lend a customer up to a
specified maximum amount during a specified period.

Roll over

Reinvest funds received from a maturing security in a new issue of the same or a similar security.

Safety-net return

The minimum available return that will trigger an immunization strategy in a contingent
immunization strategy.

Sell-side analyst

Also called a Wall Street analyst, a financial analyst who works for a brokerage firm and
whose recommendations are passed on to the brokerage firm's customers.

Spin-off

A company can create an independent company from an existing part of the company by selling or
distributing new shares in the so-called spinoff.

Spread

1) The gap between bid and ask prices of a stock or other security.
2) The simultaneous purchase and sale of separate futures or options contracts for the same commodity for delivery in different months.
Also known as a straddle.
3) Difference between the price at which an underwriter buys an issue from a firm
and the price at which the underwriter sells it to the public.
4) The price an issuer pays above a benchmark fixed-income yield to borrow money.

Strip mortgage participation certificate (strip PC)

Ownership interests in specified mortgages purchased
by Freddie Mac from a single seller in exchange for strip PCs representing interests in the same mortgages.
Stripped bond Bond that can be subdivided into a series of zero-coupon bonds.

Targeted repurchase

The firm buys back its own stock from a potential bidder, usually at a substantial
premium, to forestall a takeover attempt.

Tax-timing option

The option to sell an asset and claim a loss for tax purposes or not to sell the asset and
defer the capital gains tax.

Tolling agreement

An agreement to put a specified amount of raw material per period through a particular
processing facility. For example, an agreement to process a specified amount of alumina into aluminum at a
particular aluminum plant.

Trade

A verbal (or electronic) transaction involving one party buying a security from another party. Once a
trade is consummated, it is considered "done" or final. Settlement occurs 1-5 business days later.

Trade acceptance

Written demand that has been accepted by an industrial company to pay a given sum at a future date.
Related: banker's acceptance.

Underwriter

A party that guarantees the proceeds to the firm from a security sale, thereby in effect taking
ownership of the securities. Or, stated differently, a firm, usually an investment bank, that buys an issue of
securities from a company and resells it to investors.

Unit investment trust

Money invested in a portfolio whose composition is fixed for the life of the fund.
Shares in a unit trust are called redeemable trust certificates, and they are sold at a premium above net asset value.

Unmatched book

If the average maturity of a bank's liabilities is less than that of its assets, it is said to be
running an unmatched book. The term is commonly used with the Euromarket. Term also refers to the
condition when a firm enters into OTC derivatives contracts and chooses to hedge that risk by not making
trades in the opposite direction to another financial intermediary. In this case, the firm with an unmatched
book hedges its net market risk with futures and options, usually.
Related expressions: open book and short book.

Value manager

A manager who seeks to buy stocks that are at a discount to their "fair value" and sell them at
or in excess of that value. Often a value stock is one with a low price to book value ratio.

Vertical acquisition

Acquisition in which the acquired firm and the acquiring firm are at different steps in the
production process.

Vertical merger

A merger in which one firm acquires another firm that is in the same industry but at another
stage in the production cycle. For example, the firm being acquired serves as a supplier to the firm doing the acquiring.

Without recourse

Without the lender having any right to seek payment or seize assets in the event of
nonpayment from anyone other than the party (such as a special-purpose entity) specified in the debt contract.

Yard

Slang for one billion dollars. Used particularly in currency trading, e.g. for Japanese yen since on
billion yen only equals approximately US$10 million. It is clearer to say, " I'm a buyer of a yard of yen," than
to say, "I'm a buyer of a billion yen," which could be misheard as, "I'm a buyer of a million yen."

Z score

Statistical measure that quantifies the distance (measured in standard deviations) a data point is from
the mean of a data set. Separately, z score is the output from a credit-strength test that gauges the likelihood of
bankruptcy.

Zero-balance account (ZBA)

A checking account in which zero balance is maintained by transfers of funds
from a master account in an amount only large enough to cover checks presented.

ACCRUAL

A method of accounting in which you record expenses when you incur them and sales as you make them—not when you pay bills or receive checks in the mail.

CASH-FLOW STATEMENT

A statement that shows where a company’s cash came from and where it went for a period of time, such as a year.

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