Corporate finance and deals

BUTTONWOOD

The 1792 agreement among 24 New York brokers, signed near a buttonwood tree on Wall Street, that led to the New York Stock Exchange.

It set fixed commissions and a rule to trade with each other first. Modern exchange rules about membership and priority descend from that arrangement.

BUYBACK

A company repurchasing its own shares on the market, reducing the count outstanding and so raising earnings per share even if total earnings are unchanged.

An alternative to dividends for returning cash. Critics argue buybacks can flatter the per-share metrics that executive pay is tied to.

BUYOUT

The acquisition of a controlling stake in a company, often taking it private. A leveraged buyout funds most of the purchase with debt secured against the target itself.

The debt sits on the acquired company's balance sheet, so the target ends up carrying the borrowing used to buy it.

CAPITAL

Resources available for productive use - financial capital as funds deployed in a business, or physical capital as the equipment and structures used in production.

In banking, capital means the equity cushion absorbing losses before depositors and creditors are exposed, which is why capital requirements are the core of prudential regulation.

DILUTION

The reduction in existing shareholders' proportional ownership when a company issues new shares.

Not automatically bad - if the capital raised earns more than its cost, existing holders can be better off owning a smaller share of a larger business.

DIVIDEND

A distribution of a company's earnings to shareholders, usually paid quarterly in cash.

Cutting one is read as a serious distress signal, so managements defend the dividend well past the point where the cash could be better used elsewhere.

EQUITY

An ownership stake. In a company, the residual claim on assets after all liabilities are settled; on a balance sheet, assets minus liabilities.

Equity holders are paid last in a liquidation, which is precisely why they hold the upside if the business succeeds.

ESCROW

Money or documents held by a neutral third party until the conditions of a deal are met, at which point the holder releases them to the right party.

Beyond closing a house sale, escrow appears in acquisitions, where part of the purchase price is held back for a year or two to cover claims if the seller's representations turn out to be wrong.

FACTORING

Selling accounts receivable to a third party at a discount to get cash now instead of waiting for customers to pay.

The discount is the cost of faster cash and of transferring collection risk. Businesses with long payment terms and thin working capital use it, and the rate can be expensive compared with a bank line.

A supplier invoices $100,000 due in 60 days and sells it to a factor for $97,000 today. The $3,000 difference works out to an annual rate of roughly 19%, which is why factoring is usually a bridge rather than a permanent funding source.

FLOAT

The portion of a company's shares actually available for public trading, excluding closely held blocks. In insurance, premiums held before claims are paid.

A small float makes a stock easier to move on modest volume, which is why float size features in short-squeeze episodes.

GREENMAIL

Buying a large stake in a company, threatening a takeover, and then selling the stake back to the company at a premium to go away.

A hallmark of 1980s takeover fights. US tax law added an excise tax on these gains, and the tactic largely disappeared, though the underlying pressure returned in gentler form as activist investing.

GREENSHOE

An over-allotment option letting underwriters issue additional shares above the planned size of an offering, typically up to 15%.

Used to stabilise the price after listing: underwriters can cover a short position by exercising the option or by buying in the market.

GUIDANCE

A company's own forecast of its future results, issued alongside reported figures.

Shares often react more to a change in guidance than to the results themselves, since guidance is the forward-looking part.

A company beats its quarterly earnings estimate by a few cents, cuts its full-year revenue forecast in the same release, and its shares fall. The quarter is already over, while the forecast covers the period investors are pricing now. For that reason, beating estimates while lowering guidance usually hurts a stock, and missing estimates while raising guidance is often forgiven.

LOCKUP

A period after a listing during which insiders are contractually barred from selling their shares, commonly 90 to 180 days.

Expiry is watched closely, since a wave of newly sellable stock can weigh on the price.

NOVATION

Replacing one party to a contract with a new party, with everyone's consent, so the original party is released from the obligation.

Different from assignment, where the original party stays on the hook. Clearing houses rely on novation: they step between buyer and seller so each faces the clearing house instead of each other.

PARTNERSHIP

A pass-through business owned by two or more people or entities. It files Form 1065 and issues each owner a Schedule K-1.

The partnership itself pays no federal income tax. Income flows to the partners, who owe tax whether or not cash was distributed, which is why partnership agreements usually address tax distributions.

POISON

A poison pill, formally a shareholder rights plan, lets existing shareholders buy discounted stock if a bidder crosses an ownership threshold, making a hostile takeover far more expensive.

The point is leverage rather than prevention. Boards adopt one to force a bidder to negotiate instead of buying control on the open market.

PRIVATE

Private credit: lending by funds and other non-bank institutions directly to companies, without a syndicated loan or public bond.

It grew as bank regulation tightened after 2008. Loans are rarely traded, so valuations depend on manager estimates, and the sector has never been tested by a deep default cycle at its current size.

SPAC

A special purpose acquisition company - a shell that raises money in a listing and then seeks a private business to merge with, taking it public.

Offers a faster route to listing than a traditional IPO, with different disclosure obligations. Investors can usually redeem before a deal completes.

SPINOFF

A company separating a division into an independent entity, typically by distributing shares in it to existing shareholders.

The argument is that the parts attract more appropriate investors and sharper management focus apart than combined.

SPLIT

A stock split, where a company divides its existing shares into more shares, lowering the price per share while leaving the total value of a holding unchanged.

Nothing about the business changes. Companies do it to keep the share price in a familiar range, which can matter for options trading and for index eligibility.

SUBCHAPTER

Subchapter S of the Internal Revenue Code, which lets a qualifying corporation pass income through to shareholders instead of paying corporate tax.

The election comes with limits on the number and type of shareholders and allows only one class of stock. Owners who work in the business must take reasonable compensation as wages.

UNICORN

A privately held startup valued at more than one billion dollars.

Coined in 2013 when such companies were rare. The valuation is set by the last funding round rather than by a liquid market, so it can be stale.

VALUATION

The process of estimating what an asset or business is worth, whether by discounting expected cash flows or by comparison with similar assets.

Every valuation is a statement about assumptions. Small changes in the discount rate or the assumed growth rate move the answer far more than most presentations admit.