Definition of acquisition

acquisition

Takeover of a firm by purchase of that firm’s common
stock or assets.

Acquisition of assets

A merger or consolidation in which an acquirer purchases the selling firm's assets.

Acquisition of stock

A merger or consolidation in which an acquirer purchases the acquiree's stock.

Corporate acquisition

The acquisition of one firm by anther firm.

Horizontal acquisition

Merger between two companies producing similar goods or services.

Tax free acquisition

A merger or consolidation in which 1) the acquirer's tax basis in each asset whose
ownership is transferred in the transaction is generally the same as the acquiree's, and 2) each seller who
receives only stock does not have to pay any tax on the gain he realizes until the shares are sold.

Taxable acquisition

A merger or consolidation that is not a tax-fee acquisition. The selling shareholders are
treated as having sold their shares.

Vertical acquisition

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

Creative Acquisition Accounting

The allocation to expense of a greater portion of the price
paid for another company in an acquisition in an effort to reduce acquisition-year earnings and
boost future-year earnings. acquisition-year expense charges include purchased in-process research
and development and an overly aggressive accrual of costs required to effect the acquisition.

Policy Acquisition Costs

Costs incurred by insurance companies in signing new policies, including expenditures on commissions and other selling expenses, promotion expenses, premium
taxes, and certain underwriting expenses. Refer also to customer, member, or subscriber
acquisition costs.

Company Acquisitions

Assets acquired to create money. May include plant, machinery and equipment, shares of another company etc.

markup

the period after an announcement of a takeover bid in which stock prices typically rise until a merger or acquisition is made (or until it falls through).

Exchange of assets

acquisition of another company by purchase of its assets in exchange for cash or stock.

Exchange of stock

acquisition of another company by purchase of its stock in exchange for cash or shares.

Flow-through basis

An account for the investment credit to show all income statement benefits of the credit
in the year of acquisition, rather than spreading them over the life of the asset acquired.

Foreign direct investment (FDI)

The acquisition abroad of physical assets such as plant and equipment, with
operating control residing in the parent corporation.

Merchant bank

A British term for a bank that specializes not in lending out its own funds, but in providing
various financial services such as accepting bills arising out of trade, underwriting new issues, and providing
advice on acquisitions, mergers, foreign exchange, portfolio management, etc.

Merger

1) acquisition in which all assets and liabilities are absorbed by the buyer.
2) More generally, any combination of two companies.

Operating cycle

The average time intervening between the acquisition of materials or services and the final
cash realization from those acquisitions.

Pooling of interests

An accounting method for reporting acquisitions accomplished through the use of equity.
The combined assets of the merged entity are consolidated using book value, as opposed to the purchase
method, which uses market value. The merging entities' financial results are combined as though the two
entities have always been a single entity.

Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities'
net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared
with pooling and will result in lower net income.

Residual method

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

Risk arbitrage

Speculation on perceived mispriced securities, usually in connection with merger and
acquisition deals. Mike Donatelli, John Demasi, Frank Cohane, and Scott Lewis are all hardcore arbs. They
had a huge BT/MCI position in the summer of 1997, and came out smelling like roses.

Taxable transaction

Any transaction that is not tax-free to the parties involved, such as a taxable acquisition.

budget

a financial plan for the future based on a single level
of activity; the quantitative expression of a company’s commitment
to planned activities and resource acquisition and use

capital rationing

a condition that exists when there is an
upper-dollar constraint on the amount of capital available
to commit to capital asset acquisition

financing decision

a judgment made regarding the method
of raising funds that will be used to make acquisitions; it
is based on an entity’s ability to issue and service debt and
equity securities

just-in-time manufacturing system

a production system that attempts to acquire components and produce inventory only as needed, to minimize product defects, and to
reduce lead/setup times for acquisition and production

product- (or process-) level cost

a cost that is caused by the development, production, or acquisition of specific products or services

sunk cost

a cost incurred in the past and not relevant to any
future courses of action; the historical or past cost associated
with the acquisition of an asset or a resource

takeover

the acquisition of managerial control of the corporation
by an outside or inside investor; control is achieved
by acquiring enough stock and stockholder votes to control
the board of directors and management

unit-level cost

a cost caused by the production or acquisition
of a single unit of product or the delivery of a single
unit of service

vendor-managed inventory

a streamlined system of inventory
acquisition and management by which a supplier can
be empowered to monitor EDI inventory levels and provide
its customer company a proposed e-order and subsequent
shipment after electronic acceptance

Hurdle rate

The minimum rate of return that a capital purchase proposal must pass
before it can be authorized for acquisition. The hurdle rate should be no lower than
a company’s incremental cost of capital.

Lower of cost or market

An accounting valuation rule that is used to reduce the
reported cost of inventory to its current resale value, if that cost is lower than its
original cost of acquisition or manufacture.

leveraged buyout (LBO)

acquisition of the firm by a private group using substantial borrowed funds.

management buyout (MBO)

acquisition of the firm by its own management in a leveraged buyout.

M&A

Abbreviation for mergers and acquisitions.

poison pill

Measure taken by a target firm to avoid acquisition;
for example, the right for existing shareholders to buy additional
shares at an attractive price if a bidder acquires a large holding.

Cash Flow Provided by Operating Activities

With some exceptions, the cash effects of transactions
that enter into the determination of net income, such as cash receipts from sales of goods
and services and cash payments to suppliers and employees for acquisitions of inventory and
expenses.

First-In, First-Out (FIFO) Inventory Method

The inventory cost-flow assumption that
assigns the earliest inventory acquisition costs to cost of goods sold. The most recent inventory
acquisition costs are assumed to remain in ending inventory.

Last-In, First-Out (LIFO) Inventory Method

The inventory cost-flow assumption that assigns the most recent inventory acquisition costs to cost of goods sold. The earliest inventory
acquisition costs are assumed to remain in ending inventory.

Supplies

General supplies used throughout a company and expensed at the time
of acquisition.

Merchant Bank

A financial institution that engages in investment banking functions, such as advising clients in mergers and acquisitions, underwriting securities and taking debt or equity positions.

Rate of Return

Return on invested capital (calculated as a percentage). Often an investor has, as one of their investment criteria, a minimum acceptable rate of return on an acquisition.

Subordinated Debt

Debt instruments that provide financing for acquisitions, expansion and restructuring, take secondary security against assets, have fixed or flexible terms of repayment and charge fixed or floating interest rates.

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