Indebtedness means the aggregate value of the bank debt, loans, and other liabilities of a company. In this book we will not differentiate between Gross Indebtedness and Net Indebtedness. The difference between the two is the company’s cash and cash equivalents subtracted from gross to derive net.
Market Value means the value of all the equity ownership of a company. The expressions market capitalization, market cap, and equity value have nearly identical meanings. I will use the term Enterprise Value in this book to Market Value plus Net Indebtedness.
Profitability is the expression I use in this book for the financial term EBITDA, which stands for earnings before interest, taxes, depreciation, and amortization. EBITDA captures the amount of cash that a business is generating or burning before accounting for capital expenditures, interest payments, and taxes.
A public company has shares that are traded in open markets. Going public is the process of a private company becoming a public company, which culminates in an initial public offering (IPO). The two top stock exchanges that list public company stocks are the New York Stock Exchange (NYSE) and Nasdaq. The Securities and Exchange Commission (SEC) is an agency of the federal government that protects investors against market manipulation.
Public Equity are investors whose focus is publicly traded stocks. Private Equity (PE) are investors whose focus is established private companies. Venture Capital (VC) are investors who focus on start-ups.
Multiple of Invested Capital or MOIC is the ratio derived by dividing the dollars that are returned to the investor by the dollars invested by the investor. For example, if an investor invested $100 and received $500 in return, the MOIC would be calculated by dividing $500 by $100, resulting in a multiple of five. Absolute Return is the increase in value, or gain, received on an investment. For example, $400 would be the Absolute Return for a $100 investment that returned $500 to the investor.
Mergers and Acquisitions (M&A) is the process when two companies combine into one. If the acquired company is a public company, the majority of shareholders are required to approve the transaction through a shareholder vote. The board of directors of a public company are obligated to ensure that the company is sold for the highest possible price. To ensure it is meeting its responsibility, the board typically insists the buyer allows for a window of time (go-shop period) for other bidders to offer a higher price. If another bidder emerges and successfully outbids the original buyer, a fee is typically owed to the original buyer (breakup fee or termination fee) to compensate them for losing the deal. A higher fee means the buyer is less likely to pull out. Most M&A is the result of a constructive dialogue between a buyer and seller. However, some M&A is driven by a buyer who is not welcomed by the seller (hostile takeover), as the seller prefers an alternative outcome. The fiduciary obligations of a board of directors of a public company are used by the buyer to force the seller to consider the buyer’s hostile offer.
Bankruptcy means the value of a company is less than its Net Indebtedness. When this happens, the ownership rights to the company shift to the debt holders. A bankrupt company will file for protection, which is referred to as declare bankruptcy, and receive protection from creditors while it sorts through how to resolve the bankruptcy. A company will elect to file under either the Chapter 7 or Chapter 11 Bankruptcy Code. Under Chapter 7, a company is typically liquidated with its assets sold to the highest bidder, with proceeds used to pay back creditors. Under Chapter 11 Bankruptcy, a company is reorganized and continues to operate, with creditors assuming some or all the post-bankruptcy ownership of the company. Sometimes, when a company is heading toward bankruptcy, the management team negotiates a transaction with investors that represents a proposed resolution. The pre-packaged (pre-pack) transactions are presented to the bankruptcy judge in hopes of accelerating the bankruptcy process.