Category Archives: Definitions – IPO

Key Players In Mergers And Acquisitions



By Marv Dumon on November 26, 2011


As the race for strategic mergers and acquisitions (M&A) continues, competition will only get stiffer between the various groups of acquirers competing to buy cash-flow companies. There are different types of investor groups on the hunt for acquisitions and the source of capital affects deal structure, investment horizons and strategic direction. In this article, we discuss acquisitions led by managers, private equityspecial purpose acquisition companies(SPACs) and strategic companies.

Tutorial: Mergers And Acquisitions 101

Management-Led Buyouts
Management-led buyouts (MBOs) are acquisitions completed by a group of senior executives and former high-level operators who bring significant operational and strategic expertise. Their salaries may have been restricted by salary “bands” and ranges by their former company employers, enticing them to search for greener pastures. Successfully purchasing and running a company often provides much higher compensation, partly due to their contributed equity in deals.

Often, these former executives partner with a financier in order to help fund a transaction. Such equity partners generally control most of the outstanding shares. The new management group may earn a salary in growing the company; most importantly, they have strong incentives to increase the value of their locked-in equity. (To learn more, readHow The Big Boys Buy.)

Accumulation plays have become the standard for value enhancement. This is a “defragmentation strategy,” which involves the acquisition of many small companies in the same, or similar, industry. Combining them into a single larger entity increases equity value for shareholders, as larger companies achieve higher valuation multiples than smaller ones. MBOs have flexible investment horizons and depend on the preferences of the manager/shareholder and those of the financing partner. The investment horizon can be as short as two or three years, or the group may own the company for 20 years or more. There are typically many managers involved in the initial phase, so the financing partner or the other shareholders can purchase the shares for the investor wishing to liquidate his portion of the equity. (For related reading, see Institutional Investors And Fundamentals: What’s The Link?)

In most cases, these types of operators bring the highest level of expertise within a particular industry. MBOs are led by managers who have successfully run businesses, and because they are often required by the equity partner to contribute a meaningful percentage of their net worth, these managers have strong incentives to make the business succeed. As a means of further inducement, many financing partners enact agreements that allow these managers to earn more equity and/or cash bonuses, if the company achieves certain performance benchmarks. (For further reading, check outEvaluating Executive Compensation.)

Private Equity
The second group of investors looking to acquire companies is private equity. These acquirers have pools of capital raised from high net worth individuals, private equity fund of funds (financiers who only invest in other private equity firms), university endowments, and government and corporate pensions.

While various compensation structures pay these wealth managers to earn rates of return for investors, private equity firms typically earn a management fee of 2% of committed capital per year, as well as carried interest of 20% of profits. Attractively, the latter is taxed at the current capital gains tax rate of 15%, as opposed to the much higher ordinary income tax rates.

Private equity managers face strong incentives to earn high rates of returns, by increasing the value of portfolio assets. In terms of talent, they seek the best and brightest, and when they successfully defragment an industry and create a platform company, the exit strategy often calls for a sale to an acquiring public company that can pay higher multiples. Later rounds of fundraising often yield much higher amounts of committed capital for managers with strong track records, allowing them to increase their individual compensation, due to the increased amounts of committed capital. (For more on this topic see, Private Equity Opens Up For The Little Investor.)

Such firms normally have an investment horizon of five to seven years; the successfuldivestiture of a portfolio company allows its investors to realize returns. Due to stiff competition from other funds, these firms often partner with “executive affiliates,” former senior industry operators and executives who help source good companies, as well as run them successfully.

Special Purpose Acquisition Companies
SPACs allow common investors to access the buyout marketplace. SPACs sell their shares in lower dollar denominations and are public shell companies, often created by investment banks for the purpose of merging with a private company. In effect, these are vehicles for taking private companies public, but on a shorter and less costly time horizon than a traditional initial public offering (IPO).

SPACs are garnering popularity as a means for public shareholders to acquire companies. Financial institutions create these public shell companies in order to generate fees, as SPACs normally reserve 10 to 15% of the capital generated for various fees and accounting and legal expenses associated with a merger. These vehicles also provide ready sources of money to fund acquisitions for senior executives who would like to run a public company. Additionally, these managers receive a hefty equity stake in the public company. Investors who fund these vehicles are, in effect, betting that the managers will be able to successfully acquire a business within 12 to 18 months, and successfully run it. These shell companies are especially aggressive when it comes to acquisitions; if they are unable to successfully acquire the business, investors lose a percentage of their committed capital. Finally, these acquisition companies can pay higher multiples when acquiring a private company due to the public nature of the source of capital.

Strategic companies join the buyout frenzy when they see operating synergies, opportunities to gain market share, and other complementary strategic overlap in a target company. Private equity has helped to consolidate industries and build platform companies and has created mini competitors for the largest public strategics. When investment banks take private companies for sale in a full auction environment, strategic acquirers often pay the highest multiples due to their massive acquisition war chests.

Smaller private companies offer ready inclusion into the acquiring company, as professionalized systems in finance, human resources, procurement, legal and operations are directly carbon copied into the acquired company. Many managers and other employees at the acquired company are often let go en masse post transaction, because of the more professionalized parent organization.

Perhaps the quintessential example of a strategic acquirer is General Electric, especially under the stewardship of legendary CEO Jack Welch. Under his leadership, G.E. acquired 993 companies from a highly diverse set of industries. Due to the conglomerate nature of the public strategics, smaller strategic companies attempt to fend off hostile takeovers by including poison pill provisions in their corporate charters, which destroy value for the acquiring investors.

The Bottom Line
There are many players in the buyout landscape and they can come in many different forms. It is important to understand the structure of these key players, because their influence on the markets will remain great and will likely only increase into the future. (For more information on this topic, see Mergers And Acquisitions: Understanding Takeovers.)


What are the listing requirements for the Nasdaq?

Major stock exchanges, like the Nasdaq, are exclusive clubs – their reputations rest on the companies they trade. As such, the Nasdaq won’t allow just any company to be traded on its exchange. Only companies with a solid history and top-notch management behind them are considered. 

The Nasdaq has three sets of listing requirements. Each company must meet at least one of the three requirement sets, as well as the main rules for all companies.

Listing Requirements for All Companies
Each company must have a minimum of 1,250,000 publicly-traded shares upon listing, excluding those held by officers, directors or any beneficial owners of more then 10% of the company. In addition, the regular bid priceat time of listing must be $4, and there must be at least three market makers for the stock. However, a company may qualify under a closing price alternative of $3 or $2 if the company meets varying reequirements. Each listing firm is also required to follow Nasdaq corporate governance rules 4350, 4351 and 4360. Companies must also have at least 450 round lot(100 shares) shareholders, 2,200 total shareholders, or 550 total shareholders with 1.1 million average trading volume over the past 12 months.

In addition to these requirements, companies must meet all of the criteria under at least one of the following standards.

Listing Standard No. 1
The company must have aggregate pre-tax earnings in the prior three years of at least $11 million, in the prior two years at least $2.2 million, and no one year in the prior three years can have a net loss.

Listing Standard No. 2
The company must have a minimum aggregate cash flow of at least $27.5 million for the past three fiscal years, with no negative cash flow in any of those three years. In addition, its average market capitalization over the prior 12 months must be at least $550 million, and revenues in the previous fiscal year must be $110 million, minimum.

Listing Standard No. 3
Companies can be removed from the cash flow requirement of Standard No. 2 if the average market capitalization over the past 12 months is at least $850 million, and revenues over the prior fiscal year are at least $90 million.

A company has three ways to get listed on the Nasdaq, depending on the underlying fundamentals of the company. If a company does not meet certain criteria, such as the operating income minimum, it has to make it up with larger minimum amounts in another area like revenue. This helps to improve the quality of companies listed on the exchange.

It doesn’t end there. After a company gets listed on the market, it must maintain certain standards to continue trading. Failure to meet the specifications set out by the stock exchange will result in its delisting. Falling below the minimum required share price, or market capitalization, is one of the major factors triggering a delisting. Again, the exact details of delisting depend on the exchange.

Why did my stock’s ticker symbol change?


When a ticker symbol changes it’s usually not a good sign. Tickers of publicly traded companies generally only change for one of four reasons:

  1. The company has merged with another company.
  2. The company had a name change.
  3. The company has been delisted (indicated by symbols such as .PK, .OB or .OTCBB).
  4. The company has filed financial statements late or even gone bankrupt.

When a ticker symbol changes because of a merger, the company being acquired usually gives up its ticker symbol in favor of the acquirer’s symbol. Corporate actions such as mergers can often be positive for a company, especially if the company is taken over for a premium over the share price.

Sometimes, a ticker symbol changes because the company has changed its name. For example, when AOL Time Warner dropped the AOL and became simply Time Warner, it changed its symbol from AOL to TWX. A company name change generally doesn’t mean much, though you might interpret it as positive sign if it reflects a positive change in the company’s overall strategy.

If your ticker symbol has had letters added to it such as .PK, .OB or .OTCBB, this means the stock has been de-listed and is no longer trading on the exchange on which you purchased it, but rather on the less liquid and more volatile over-the-counter market. More specifically, a .PK indicates that your stock is now trading on the pink sheets, while an .OB suffix or .OTCBB prefix represents the over-the-counter bulletin board. A stock that has been de-listed is like a baseball player who has been sent from the major leagues to the minor leagues. For some reason, the stock is no longer worthy of trading on a major exchange such as the New York Stock Exchange or Nasdaq, probably because it failed to maintain the exchange’s requirements. (To see these requirements, see What are the listing requirements for the Nasdaq?)

You may have also noticed that Nasdaq-listed securities have four or five characters. In this case, the fifth character often communicates a piece of information, and it can also mean something is wrong with the company. For example, if a “Q” has been added, this means that a company is in bankruptcy proceedings, and “E” means the company is late on its SECfilings. Below is a complete list of fifth symbols on the Nasdaq and what they mean:

A – Class A
B – Class B
– Issuer qualifications exceptions
D – New
E – Delinquent in required filings with the SEC
F – Foreign
G – First convertible bond
– Second convertible bond
I – Third convertible bond
J – Voting
K – Nonvoting
L – Miscellaneous situations, such as depositary receipts, stubs, additional warrants and units
M – Fourth class of preferred shares
– Third class preferred of preferred shares
O – Second class preferred of preferred shares
P – First class preferred of preferred shares
Q – Bankruptcy proceedings
R – Rights
S – Shares of beneficial interest
T – With warrants or with rights
U – Units
V – When issued and when distributed
W – Warrants
– Mutual Fund
Y – ADR (American Depositary Receipt)
Z – Miscellaneous situations, such as depositary receipts, stubs, additional warrants and units


Definition of ‘Common Stock’

A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a company’s assets only after bondholders, preferred shareholders and other debtholders have been paid in full. 

In the U.K., these are called “ordinary shares.”

Investopedia explains ‘Common Stock’

If the company goes bankrupt, the common stockholders will not receive their money until the creditors and preferred shareholders have received their respective share of the leftover assets. This makes common stock riskier than debt or preferred shares. The upside to common shares is that they usually outperform bonds and preferred shares in the long run.

Definition of ‘Yield’














The income return on an investment. This refers to the interest or dividends received from a security and is usually expressed annually as a percentage based on the investment’s cost, its current market value or its face value.

Investopedia explains ‘Yield’

This seemingly simple term, without a qualifier, can be rather confusing to investors.

For example, there are two stock dividend yields. If you buy a stock for $30 (cost basis) and its current price and annual dividend is $33 and $1, respectively, the “cost yield” will be 3.3% ($1/$30) and the “current yield” will be 3% ($1/$33).

Bonds have four yields: coupon (the bond interest rate fixed at issuance), current (the bond interest rate as a percentage of the current price of the bond), and yield to maturity (an estimate of what an investor will receive if the bond is held to its maturity date). Non-taxable municipal bonds will have a tax-equivalent (TE) yield determined by the investor’s tax bracket.

Mutual fund yields are an annual percentage measure of income (dividends and interest) earned by the fund’s portfolio, net of the fund’s expenses. In addition, the “SEC yield” is an indicator of the percentage yield on a fund based on a 30-day period.



Shares outstanding



Shares outstanding are all the shares of a corporation or financial asset that have been authorized, issued and purchased by investors and are held by them. They have rights and represent ownership in the corporation by the person that holds the shares. They are distinguished from treasury shares, which are shares held by the corporation itself and have no exercisable rights. Shares outstanding plus treasury shares together amount to the number of issued shares.

Shares outstanding can be calculated as either basic or fully diluted. The basic count is the current number of shares. Dividend distributions and voting in the general meeting of shareholders are calculated according to this number. The fully diluted shares outstanding count, on the other hand, includes diluting securities, such as warrantscapital notes or convertibles. If the company has any diluting securities, this indicates the potential future increased number of shares outstanding.

Finding the number of shares outstanding[edit]

The number of outstanding shares may change due to changes in the number of issued shares as well as the change in treasury shares. Both can occur at any time of the year. There are several useful public sources to find the number of shares outstanding of a given corporation.

Public traded companies investors relation

The financial reporting obligation of the public traded company also ensures the publication of issued and outstanding shares. The reports are usually available in the investors relations section of the companies web site. Web directories are supporting direct access to company web sites.[1][2] Public traded companies bundles the reports normally in the investor’s relation section, e.g. Deutsche Bank AG,[3] Eni S.p.a.,[4] Anheuser Busch InBev SA,[5] EDP – Energias do Brasil SA[6] or Accor SA.[7]

Authorized information service

In many countries there is an information service authorized or provided by the local financial authority which gives access to the companies financial reporting. In the United States the number of shares outstanding may be obtained from quarterly filings with the U.S. Securities and Exchange Commission. Quarterly filings are accessible using the US EDGAR.[8] In Germany those figures are available using the German company register, the central platform for storage of company data.[9] In the Netherlands the Netherlands Authority for the Financial Markets (AFM) provides on its web site a register of issued capital.[10] In Italy, the Commissione Nazionale per le Società e la Borsa (CONSOB) provides on its web site a register of issuers with latest total shares.[11]

Local stock exchanges

Since outstanding shares are an essential detail of public traded companies the number can be found on the local stock exchange web sites. Beyond stock charts and lasted prices they in almost all cases also provides the companies number of outstanding shares. E.g. the Brazilian BM&FBOVESPA,[12]the Swiss SIX,[13] the Borsa Italiana[14] or the Tel Aviv Stock Exchange (where shares outstanding are termed “Capital Listed for Trading”).[15]











Definition of ‘Blue-Chip Stock’

Stock of a large, well-established and financially sound company that has operated for many years. A blue-chip stock typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name. While dividend payments are not absolutely necessary for a stock to be considered a blue-chip, most blue-chips have a record of paying stable or rising dividends for years, if not decades. The term is believed to have been derived from poker, where blue chips are the most expensive chips.


Investopedia explains ‘Blue-Chip Stock’

A blue-chip stock is generally a component of the most reputable market indexes or averages, such as the Dow Jones Industrial Average, the S&P 500 and the Nasdaq-100 in the United States, the TSX-60 in Canada or the FTSE index in the United Kingdom.

While a blue-chip company may have survived several challenges and market cycles over the course of its life, leading to it being perceived as a safe investment, this may not always be the case. The bankruptcy of General Motors and Lehman Brothers, as well as a number of leading European banks, during the global recession of 2008, is proof that even the best companies may sometimes be unable to survive during periods of extreme stress.

Definition of ‘Outstanding Shares’


A company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS).

A company’s number of outstanding shares is not static, but may fluctuate widely over time. Also known as “shares outstanding.”


Investopedia explains ‘Outstanding Shares’

A company’s outstanding shares will increase if it issues additional shares. Companies typically issue shares when they raise capital through an equity financing, or upon exercising employee stock options. Outstanding shares will decrease if the company buys back its shares under a share repurchase program.

The number of shares outstanding will double if a company undertakes a 2-for-1 stock split, or will be halved if it undertakes a 1-for-2 share consolidation. Stock splits are usually undertaken to bring the share price of a company within the buying range of retail investors; the doubling in the number of outstanding shares also improves liquidity. Conversely, a company will generally embark on a share consolidation to bring its share price into the minimum range necessary to satisfy exchange listing requirements. While the lower number of outstanding shares may hamper liquidity, it could also deter short sellers since it will be more difficult to borrow shares for short sales.

For a blue chip stock, the increased number of shares outstanding due to share splits over a period of decades accounts for the steady increase in its market capitalization, and concomitant growth in investor portfolios. Of course, merely increasing the number of outstanding shares is no guarantee of success; the company has to deliver consistent earnings growth as well.

While outstanding shares are a determinant of a stock’s liquidity, the latter is largely dependent on its share float. A company may have 100 million shares outstanding, but if 95 million of these shares are held by insiders and institutions, the float of only 5 million may constrain the stock’s liquidity.

Definition of ‘Buyout’


The purchase of a company’s shares in which the acquiring party gains controlling interest of the targeted firm. Incorporating a buyout strategy is a common technique used to gain access to new markets and is one of the most common methods for inorganically growing a business.

Investopedia explains ‘Buyout’

A leveraged buyout is accomplished by borrowed money or by issuing more stock. Buyout strategies are often seen as a fast way for a company to grow because it allows the acquiring firm to align itself with other companies that have a competitive advantage in a specific area.