A Management Buyout (MBO) is a corporate action taken by the management of a firm, where they buy all the available shares in their own company in order to take the company private. This is done because the management feels it can improve the firm but that the actions they take may not be approved by existing shareholders, so they take full control to do what they think needs to be done, frequently teaming up with a private equity or venture capital firm in the process.
Margin is a concept frequently explored in investing / trading and it refers to borrowed money which is used to invest (a.k.a. investing on the margin). This is essentially leverage, and the investor may experience margin calls if the equity requirements (the amount they have to put up) increase on the asset or if their position starts losing a lot of money.
As with leverage, investing on the margin amplifies return and loss, and also adds the cost of interest payments.
A market maker is an individual or firm which connects buyers and sellers of an asset - hence making a market. The market maker will usually hold the asset and then find a seller, and assumes some of the risk of the asset devaluing. To compensate for this risk, they will offer slightly different prices and spreads and make tiny profits on thousands of trades.
For example, a market maker may buy US treasuries from one client at 98.5 and sell them to another for 98.55, thereby making 0.05 per unit. This can quickly add up when trading vast quantities.
Maturity is part of a loan contract which specifies the end of the life of the asset, i.e. when the principal will be repaid. For example, US 10 year Treasury bonds will have the principal amount repaid in 10 years time. Usually the longer the maturity, the higher the yield as there is more of a risk of default due to the unpredictability of long-term events.
A merger is when two or more companies combine to increase value and enhance operations. This is a pre-agreed action and is not seen as hostile. A merger should always provide increased benefits and Earnings Per Share for shareholders in both companies, or else it is unlikely to be worth doing.
The process for a merger model is as follows:
- Calculate Purchase Price - this can be done using precedent transactions, public comparable companies and a DCF valuation.
- Determine Financing Method - calculate the percentage of the deal which will be financed by debt, equity and stock.
- Project & Combine Financial Profiles - the Income Statement, Balance Sheet and Cash Flow Statement of both the buyer and seller must be combined and adjusted for acquisition effects.
- Calculate Accretion & Dilution - work out the change in EPS and create sensitivity tables to model different scenarios.
Mergers & Acquisitions, or M&A is a group in an investment bank that is specialized in providing advisory services to clients on the purchase, sale and merger of private or public companies. They typically operate across all industry sectors.
Working within M&A requires a lot of pitching to companies using pitch books and financial models to show the potential returns of a merger or acquisition. One of the most prestigious M&A departments is at Morgan Stanley.
A mid-cap (middle capitalization) firm is one with a market capitalization between $2 and $10 billion. This figure is an approximation and may change over time or be defined different among different industries.
A monopoly refers to the situation where one firm controls either all or the vast majority of a market, allowing it to pursue strategies and pricing which may be unfair on consumers and would not be possible in a competitive market. A true monopoly is very rare, although an oligopoly is quite common in some sectors.
There is such a thing as a 'natural monopoly', which is where the industry can only really exist as a monopoly due to the impracticalities of operating under competition. For example, a railroad has to be operated by one company, as it is not feasible for different firms to own different lengths of track and have different prices and qualities etc.
A mutual fund is one which is made up of money from lots of different individual investors, and then managed by a professional portfolio manager. Mutual funds invest in all the usual assets such as:
The amount an investor gains or loses in the fund is directly proportional to the amount they invest into the fund. Mutual funds typically have a target level of return and usually charge a management fee of 1-2% per annum.
Net Income refers to post-tax profit and is also known as net profit. The basic formula for net income is:
- Revenue - All Costs + Interest Income - Interest Expense - Taxation
For example, if total revenue is $100mm, COGS and other Operating Expenses are $50mm, there is no interest income or expense and the company pays 35% tax, Net Income would be (100,000,000 - 50,000,000) * (1-0.35) = $32.5mm.
Net Income is a measure of profitability but it is not capital-structure neutral (EBITDA is) and it is affected by taxation laws (EBITDA and EBIT are not), so it is less useful for valuation purposes than EBITDA. For this reason, you very rarely see multiples including Net Income but almost all multiples include EBITDA in some form.
Net Income is found on the Income Statement and Cash Flow Statement.
A non-disclosure agreement, or NDA, is a contract signed between parties which creates an agreement to keep any important information out of the public domain. This is most typically associated with new ideas, sensitive information or any other kind of business process. Employees usually have to sign NDA's upon joining a company as they are likely to be privy to important information which the company would not want leaked.
A NDA may also be known as a Confidentiality Agreement (CA).