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Mergers and Acquisitions Basics

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Earnout

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A contractual provision that stipulates that the sellers of a company will earn future compensation based on the company achieving certain financial goals.

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Merger

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The combination of two or more entities to form a new entity, often with the aim of achieving market synergies or efficiencies.

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Friendly Takeover

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An acquisition where the target company's management and board of directors agree to the takeover by another company.

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Anti-trust Laws

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Regulations that promote competition by limiting market domination by any single entity, relevant in mergers and acquisitions to prevent the creation of monopolies.

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Material Adverse Change (MAC)

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A clause in a merger or acquisition contract that allows the acquirer to back out if the target company experiences a significant deterioration in its business.

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Hostile Takeover

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A type of acquisition where the target company does not want to be acquired and the acquiring company proceeds with the takeover without the target company's approval.

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White Knight

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A friendly investor or company that acquires a corporation at fair consideration when it is under threat of a hostile takeover.

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Synergy

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The potential financial benefit that is expected from the combining of two or more companies into a single combined entity.

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Leveraged Buyout (LBO)

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A type of acquisition where a company is purchased primarily with debt, using the assets of the acquired company as collateral.

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Poison Pill

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A defensive strategy used by a target company to prevent or discourage hostile takeover attempts.

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Due Diligence

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A comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.

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Tender Offer

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An offer made directly to shareholders to buy their shares at a specified price, typically higher than the market price, in order to take over the company.

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Breakup Fee

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A penalty set in a merger or acquisition agreement to be paid if the seller backs out of a deal to sell to a purchaser.

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Acquisition

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The process where one company takes over another company by purchasing a controlling interest in the targeted firm.

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Golden Parachute

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A pre-negotiated agreement that gives a company's top executives significant financial benefits if they are terminated as a result of a merger or takeover.

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