High Yield Debt - Subordinated financing incurred by an issuer in connection with a leveraged buyout or recapitalization, usually raised via a road show sponsored by the company's investment bank and sold to high yield investors such as mutual funds and insurance companies. An investment bank may issue a "highly confident" letter to an issuer prior to commencing the road show; such letters are always subject to market conditions and are rarely honored during volatile markets.
Implied Volatility - A measure of the market's prediction
of a stock's future volatility, derived from a weighted average
of the current volatilities of at-the-money options (see "Risk
Capital".
Involuntary Bankruptcy - A bankruptcy petition field by three or more creditors holding defaulted, unsecured claims against a company. A company may proceed under this petition of file a separate voluntary petition (see "Bankruptcy").
Leveraged Buyout - An acquisition whereby the target
is acquired with proceeds borrowed from lenders, usually sponsored
by a private firm or hedge fund specializing in LBO's.
Material Adverse Change - An important clause contained
in every merger and financing commitment agreement under which either or both parties
may terminate a transaction due to financial performance or market-related events.
Maximum Loss - The potential loss an investment may
sustain assuming a transaction is terminated and trading positions
are liquidated at prices two standard deviations worse than
adjusted pre-transaction levels.
Merger Agreement - A binding contract executed between
the acquiror and target companies, signed as of the date of
the definitive agreement and filed with the SEC on Form 8-K.
Mezzanine Loan - A short-term, subordinated loan, similar to a bridge loan, incurred in connection with a leveraged buyout or recapitalization, usually with less onerous terms that a bridge loan, that is provided by an institutional mezzanine lender or fund - A tender offer, filed on Schedule 14D-9 or TO-T.
Net Return - Annualized return on investment after
commissions, cost of carry, short rebates and long and short
dividends.
Net Spread - The dollar discount a target company's
shares are trading to the "parity" value of a deal
after dividends, carry, rebates and commissions. A target
stock trading at a premium to parity would result in a negative
net spread.
Offer to Purchase - A tender offer, filed on Schedule
14D-9 or TO-T.
Office of the Comptroller of the
Currency ("OCC") - The official
regulatory body which charters and supervises U.S.-based banks; also responsible for
approving thrift bank mergers.
Operating Income - A company's earnings before interest
taxes and other expenses.
Parity - The value a target company's shareholders
will receive in a merger or acquisition, expressed in dollar-amounts
on a per-share basis, which may be fixed or fluctuating depending
on the consideration.
Pay-in-Kind ("PIK") - A subordinated debt or preferred equity security issued to a target company's shareholders, generally in addition to other consideration (cash or stock), that pays interest or dividends in the form of additional like securities.
Payment Date - The date on which shareholders of a
target company receive the actual consideration for their
shares, typically three to five business days after the closing
date.
Portfolio - The aggregate of all trading positions
held, typically assorted alphabetically by the target company.
Pre-packaged Bankruptcy - A negotiated settlement
among defaulting company and its creditors that sets forth
a specific bankruptcy plan filed in conjunction with the company's
bankruptcy petition which generally eliminates years of court-mandated
negotiations and is simply confirmed by the bankruptcy court
judge.
Proposal - An unsolicited offer, either hostile or
friendly, made by an acquiring company for all or part of
a target company's shares.
Pricing Period - The range of trading days used to
determine the Average Price, typically commencing ten to twenty
days prior to the shareholder vote date and ending three to
five trading days prior to such date.
Recapitalization - A leveraged acquisition similar
to a leveraged buyout whereby a certain percentage of the
target company's shares will remain outstanding.
Reorganization - A form of voluntary bankruptcy (chapter
11) in which the company can avoid liquidation. The company's
financial structure changes and its management can be replaced
by a court-appointed trustee, who tries to solve the company's
financial troubles through negotiations with the company's
creditors.
Reverse - A trading strategy whereby an investor sells
short shares in the target company and buys shares in the
acquiring company, typically employed when the spread is trading
at levels deemed too tight given the transaction's deal risk
(also known as "Chinese" trades). .
Risk Capital - The amount of equity "at risk"in an
investment if a transaction is terminated representing the
most likely realized trading loss on the entire investment
(see also "Maximum Loss".
Securities and Exchange Commission Schedules and Forms:
Schedule 13D - Securities and Exchange Commission form required buyers of five percent (5%) of registered equity security
to file this schedule with the SEC within ten business days of such purpose.
Schedule 13E-3 is required in connection with all
"going private" transactions. The disclosure requirements
are meant to inform investors of a company's intention to
engage in a transaction, which will result in the cessation
of periodic reporting requirements under the Securities Exchange
Act of 1934.
Schedule 14A provides the information required to
be contained within the proxy statement and must be sent to
shareholders and filed with the Commission when proxy is solicited.
The information requirements of the proxy statement are outlined
below. Many items, however, are not required in a proxy statement
for a typical annual meeting of shareholders. Also, small
business issuers may be exempt from certain disclosures.
Schedule 14D-1 requires disclosure by persons planning
tender offers for securities. Such disclosure is to keep investors
and the management of companies apprised of takeovers by
outsiders (also filed as Schedule TO-T.
Schedule 14D-9 of the Securities Exchange Act of 1934
requires full disclosure of any solicitation or recommendation
to a target company's shareholders either to accept or reject
a tender by someone else.
Form 8-K is considered the "current report."It is
used to report any material events or corporate changes that
are important to investors or security holders. Unlike the
periodic reports (see Form 10-K and Form 10-Q), the purpose
of Form 8-K is to provide more current information on certain
specified events. The key to Form 8-K is that the disclosure
obligation is mandatory only with respect to certain specified
events. Any one of the following events is mandatory under
Form 8-K.
Form 10-Q is used for quarterly financial disclosure
reports. It must be filed within 45 days after the end of each
of the first three fiscal quarters (it does not have to be
filed for the fourth quarter.) The quarterly shareholder report
of a company may be incorporated in response to the requirements
of Part I of Form 10-Q if the reports are made available to
shareholders within the 45-day filing requirement, and if
a copy of the quarterly report is filed as an exhibit to Part
I. In certain circumstances, a company may use a combined
report that serves both the quarterly shareholders report
and the Form 10-Q requirements. Finally, the form must be
signed on the registrant's behalf by a duly authorized officer
of the registrant and by the principal financial or chief
accounting officer.
Form 10-K requires full financial disclosure
and is filed annually within 90 days of a company's fiscal
year-end. The intent of the securities laws is to use mandatory
disclosure of material information as the basis for promoting
intelligent investing and limiting securities fraud. By establishing
clear guidelines and procedures for filing material financial
and business information, the 10-K provides some assurance
that a company has made adequate disclosures; otherwise it
may be subject to the anti-fraud provisions of the Securities
Exchange Act of 1934.
Form S-1 of the Securities Act of 1933 is a basic disclosure document used by companies registering securities in connection with an offering pursuant to the Securities Act of 1933. It is commonly used by companies "going public". Also known as a prospectus.
Form S-3 of the Securities Act of 1933 is an even
more-simplified optional registration form than either Form
S-1 or Form S-2. This Form allows for incorporation reference
from the 1934 Act reports.
Form S-4 - The disclosure document used in connection
with the registration of securities in connection with business
combinations, including
mergers, exchange offers (either for the issuer's shares or
shares of another entity) or stock re-distributions.
Second Request - The Hart-Scott-Rodino rules allow the
FTC or the Antitrust Division of the Department of Justice ("DOJ") to
extend the initial 30-day waiting period (15 days for tender offers) by requesting
additional information. Once substantial compliance with the request is certified,
then the waiting period will be extended for 20 days (10 days for tender offers).
Senior Debt Financing - Bank borrowing by a company
in connection with an acquisition, restructuring or leveraged
buyout that is structurally senior in ranking and collateral
protection to subordinated debt financing.
Set-Up - A limit order to buy a position on a spread
basis (also known as a "put-on" order).
Sherman Antitrust Act - A law passed in 1890 enabling
the administrative branch of the federal government to investigate
business combinations that may dominate a specific industry
or manipulate prices, (see Antitrust and Hart-Scott-Rodino
Act). The Justice Department's Antitrust Division or the Federal
Trade Commission
may sue an acquiror to enjoin its acquisition of a target
company in federal court.
Short Position - Selling borrowed shares, typically
of an acquiror's stock in a stock-swap transaction, to lock-in
an arbitrage spread.
Solicitation - A request for proxy, or shareholder
vote, on corporate matters including hostile takeovers where
one company seeks to replace some or all of target company's
board of directors or to eliminate certain corporate governance
by-laws, usually filed on a Schedule 14D-9.
Stock Swap - A merger whereby an acquiring company
issues its shares to a target company's shareholders in either
a fixed or floating ratio.
Subordinated Debt - Financing provided by lenders
such as insurance companies, high yield mutual funds or "mezzanine"
funds that is subordinated to the acquisition's senior bank
financing. Certain investment banks may provide "commitment"
letters or bridge loans, both of which are highly subject
to future market conditions.
Tender Offer - An offer to purchase up to 100% of
a target company's outstanding shares for a fixed cash amount,
typically lasting twenty business days prior to closing. May
be subject to a minimum amount of a target company's shares
being tendered into the offer to purchase.
Total Enterprise Value ("TEV") - The aggregate
valuation of target company's assets and liabilities, also
expressed on a per share basis.
Unsolicited Proposal - An offer, either friendly or
hostile, from one company to buy another company (also known
as a "bear hug", generally necessitating the target company
to form an independent special board-of-directors committee
to review the proposal.
Unwind - A limit order to sell or reverse a position
on a spread basis (also known as "take-off" order).
Volatility - A stock price's fluctuation within a
short period of time, which affect spread levels, measured
by the standard deviation of daily stock price changes.