What Is an Agent?

An agent, in legal terminology, is a person who has been legally empowered to act on behalf of another person or an entity. An agent may be employed to represent a client in negotiations and other dealings with third parties. The agent may be given decision-making authority.

Two common types of agents are attorneys, who represent their clients in legal matters, and stockbrokers, who are hired by investors to make investment decisions for them. The person represented by the agent in these scenarios is called the principal. In finance, it refers to a fiduciary relationship in which an agent is authorized to perform transactions on behalf of the client and in their best interest.

Understanding an Agent

An agent is someone that is given permission (either explicitly or assumed) to act on an individual’s behalf and may do so in a variety of capacities. This could include selling a home, executing a will, managing a sports career, managing an acting career, being a business representative, and so on.

Agents often have expertise in a specific industry and are more knowledgeable about that industry’s ins and outs than the average person. For example, if you started gaining attention as a musician, you would hire a music agent to help guide you through getting a record deal, signing record contracts, and arranging your touring schedule.

As you would not have any experience with the record industry, you would need an agent to look out for your best interests and take care of a lot of the work that you would otherwise most likely not be able to complete on your own. This would also free up your time so that you can concentrate on making music.

Types of Agents

Agents come in all types depending on their function and the industry in which they operate. In general, there are three types of agents: universal agents, general agents, and special agents.

Universal Agents

Universal agents have a broad mandate to act on behalf of their clients. Often these agents have been given power of attorney for a client, which gives them considerable authority to represent a client in legal proceedings. They may also be authorized to make financial transactions on behalf of their clients.

General Agents

General agents are contracted to represent their clients in specific types of transactions or proceedings over a set period. They have broad authority to act but in a limited sphere. A talent agent for an actor would fall under this category.

Special Agents

Special agents are authorized to make a single transaction or a series of transactions within a limited period. This is the type of agent most people use from time to time. A real estate agent, securities agent, insurance agent, and travel agent are all special agents.

Uses of Agents

People hire agents to perform tasks that they lack the time or expertise to do for themselves. Investors hire stockbrokers to act as middlemen between them and the stock market. Athletes and actors hire agents to negotiate contracts on their behalf because the agents are typically more familiar with industry norms and have a better idea of how to position their clients.

More commonly, prospective homeowners use agents as middlemen, relying on the professional’s greater skills at negotiation.

Businesses often hire agents to represent them in a particular venture or negotiation, relying on the agents’ superior skills, contacts, or background information to complete deals.

Loyalty Responsibilities of an Agent

Duty of Avoiding Material Benefit

During the course of business, an agent may benefit. This is especially true when an agent is paid to perform a task on behalf of the principal. For example, a real estate agent commonly receives a commission for their work in selling a house.

When acting on behalf of another, an agent must ensure they do not unjustly benefit from their agency position. This includes receiving large benefits from the relationship or taking advantage of their position to ensure they receive benefits that would not normally as part of a normal transaction.

Duty Not to Usurp

When an agent acts on behalf of a principal, the agent may receive information it would be able to personally capitalize on for personal benefit. For example, an agent may receive information relating to a potential investment opportunity. The agent owes the principal the duty to not steal or supplant the principal’s ability to transact. In this example, the principal retains the right to decide whether or not to invest; the agent must not take the place of the principal without the principal explicitly declining an opportunity to invest.

Duty to Not Compete

On a similar note, an agent may not enter into transactions or business that compete with a principal. This conflict of interest puts the principal at a disadvantage as the agent may obtain trade or business secrets during the course of the business relationship. For example, imagine if an agent was tasked with shipping specific goods to an agent’s manufacturing warehouse. The agent could obtain information related to the principal’s operations that the agent could then use for its personal benefit.

Duty of Transparency

Formalized agent-principal arrangements often include verbiage that the agent must disclose if it has any other principals in which it is acting as an agent for. This includes disclosing a sworn statement that the agent will act in good faith across all principals and will incur fair dealing with each principal.

Duty to Protect Information

During the course of an agent’s relationship with the principal, the agent may not disclose confidential information to unrelated parties. This may defined through confidentiality agreements or may not be explicitly called out. In either case, the agent must take care to evaluate the sensitivity of information and the necessity for other parties to obtain that information. This includes not using confidential information for the personal benefit of the agent (i.e. exchanging the information for personal benefit to an independent third party).

Performance Responsibilities of an Agent

Duty of Contract

All terms of any written agreement between an agent and a principal define the relationship between the two. For many agent and principal relationships, the contract is not explicitly defined upfront. However, custom or deliberate agreements may call for very specific terms that define what is and isn’t allowed.

Duty of Care

An agent is always tasked with acting with care and competence when handling affairs of the principal. The standard is often held that the agent must act as the principal would, using discretion as if it would incurring the personal gain or loss. Though the level of care may not be explicitly defined, the level of care should be equal to what is reasonably expected by local standards.

The duty of care may be complicated when considering the agent’s personal benefit potential. For example, consider a broker that receives a commission for the sale of certain investment products. For some clients, it may not be in their best interest to buy those investments. Therefore, the broker has the duty of care to not sell such products to those individuals, sacrificing personal gain to uphold the sanctity of the relationship.

Duty of Obedience

An agent must comply with reasonable instruction. Though there may be situations where acting on one’s behalf and following their guidance is not reasonable or legal, the agent may have recourse to not follow instruction. Otherwise, the agent is bound to perform tasks as expected by the agreement. This includes situations where the principal may be disadvantaged but has instructed the agent to act in a specific manner.

Duty of Disclosure

As the agent gains sensitive information that may influence the decision-making process of a principal, the agent has the duty to disclose that information in an accurate, timely manner. Consider the example of Los Angeles Dodgers’ player Freddie Freeman. Freeman’s agent reportedly did not disclose to Freeman that his former team, the Atlanta Braves, wanted to re-sign him. By withholding such information, Freeman reluctantly signed with a different team.

Duty of Separation

An agent also has the responsibility to keep the agent’s and the principal’s affairs separately. This includes ensuring that any transactions entered into on behalf of the principal are still legal property of the principal. This also ensures that any resources or capital used to transact are maintained in separate bank accounts and that separate reporting ledgers are maintained.

Agent Liability

An agent is often liable to their principal if they violate their duty or deviate from a reasonable, expected action performed on behalf of the other party. This may be the result of exceeding the authority they’ve been given, acting in misconduct, being unreasonably negligent, or any other situation where the principal may incur a loss that could have potentially been avoided.

In some situations when the agent performs a task for another without disclosing they are an agent, they may be considered liable because the agent was presumed to be a principal. An agent is also commonly liable when the agent expressly incurs a personal liability by entering into an associated agreement.

Agency by Necessity

There is also “agency by necessity,” in which an agent is appointed to act on behalf of a client who is physically or mentally incapable of making a decision. This is not always a case of incapacitation. Business owners, for example, might designate agents to handle unexpected issues that occur in their absence. For example, if a CEO was on a flight and unreachable yet an emergency business decision needed to be made, agency by necessity could be used.

Agency by necessity is most often executed in times of emergency or urgency when the primary party is not available to make a decision. In these situations, courts would recognize a third party making the decision if that party was given power by the primary party to do so. The third party would be responsible for acting in the primary party’s best interest.

Estate planning often sees agency by necessity. Though an individual may have created a will outlining how an estate should be disbursed at their time of death, there could be situations where the person became incapacitated before needed adjustments to the will were made. Here, agency by necessity could be used by a trusted party.

The Bottom Line

An agent is anyone that has been entrusted to act on behalf of another individual. People usually call upon an agent when they need someone with more expertise or when they don’t have the time to complete a task.

Agents are commonly used in the finance, law, real estate, insurance, acting, and music industries, yet they can be found in almost any situation when advanced knowledge on a topic is needed. Agents can save people a lot of time, money, and headaches in getting important tasks done.

What Is the Accumulation/Distribution Indicator (A/D)?

The accumulation/distribution indicator (A/D) is a cumulative indicator that uses volume and price to assess whether a stock is being accumulated or distributed. The A/D measure seeks to identify divergences between the stock price and the volume flow. This provides insight into how strong a trend is. If the price is rising but the indicator is falling, then it suggests that buying or accumulation volume may not be enough to support the price rise and a price decline could be forthcoming.

The Accumulation/Distribution Indicator (A/D) Formula

$\begin{aligned}&\text{MFM} = \frac {(\text{Close} – \text{Low} ) – ( \text{High} – \text{Close} ) } {\text{High} – \text{Low} } \\&\textbf{where:}\\&\text{MFM} = \text{Money Flow Multiplier} \\&\text{Close} = \text{Closing price} \\&\text{Low} = \text{Low price for the period} \\&\text{High} = \text{High price for the period} \\ \end{aligned}$​MFM=High−Low(Close−Low)−(High−Close)​where:MFM=Money Flow MultiplierClose=Closing priceLow=Low price for the periodHigh=High price for the period​

$\begin{aligned}&\text{Money Flow Volume} = \text{MFM} \times \text{Period Volume} \\ \end{aligned}$​Money Flow Volume=MFM×Period Volume​

$\begin{aligned}&\text{A/D} = \text{Previous A/D} + \text{CMFV}\\&\textbf{where:}\\&\text{CMFV} = \text{Current period money flow volume} \\ \end{aligned}$​A/D=Previous A/D+CMFVwhere:CMFV=Current period money flow volume​

How to Calculate the A/D Line

1. Start by calculating the multiplier. Note the most recent period’s close, high, and low to calculate.
2. Use the multiplier and the current period’s volume to calculate the money flow volume.
3. Add the money flow volume to the last A/D value. For the first calculation, use money flow volume as the first value.
4. Repeat the process as each period ends, adding/subtracting the new money flow volume to/from the prior total. This is A/D.

What Does the Accumulation/Distribution Indicator (A/D) Tell You?

The A/D line helps to show how supply and demand factors are influencing price. A/D can move in the same direction as price changes or in the opposite direction.

The multiplier in the calculation provides a gauge for how strong the buying or selling was during a particular period. It does this by determining whether the price closed in the upper or lower portion of its range. This is then multiplied by the volume. Therefore, when a stock closes near the high of the period’s range and has high volume, it will result in a large A/D jump. Alternatively, if the price finishes near the high of the range but volume is low, or if the volume is high but the price finishes more toward the middle of the range, then the A/D will not move up as much.

The same concepts apply when the price closes in the lower portion of the period’s price range. Both volume and where the price closes within the period’s range determine how much the A/D will decline.

The A/D line is used to help assess price trends and potentially spot forthcoming reversals. If a security’s price is in a downtrend while the A/D line is in an uptrend, then the indicator shows there may be buying pressure and the security’s price may reverse to the upside. Conversely, if a security’s price is in an uptrend while the A/D line is in a downtrend, then the indicator shows there may be selling pressure, or higher distribution. This warns that the price may be due for a decline.

In both cases, the steepness of the A/D line provides insight into the trend. A strongly rising A/D line confirms a strongly rising price. Similarly, if the price is falling and the A/D is also falling, then there is still plenty of distribution and prices are likely to continue to decline.

The Accumulation/Distribution Indicator (A/D) vs. On-Balance Volume (OBV)

Both of these technical indicators use price and volume, albeit somewhat differently. On-balance volume (OBV) looks at whether the current closing price is higher or lower than the prior close. If the close is higher, then the period’s volume is added. If the close is lower, then the period’s volume is subtracted.

The A/D indicator doesn’t factor in the prior close and uses a multiplier based on where the price closed within the period’s range. Therefore, the indicators use different calculations and may provide different information.

Limitations of Using the Accumulation/Distribution Indicator (A/D)

The A/D indicator does not factor in price changes from one period to the next, and focuses only on where the price closes within the current period’s range. This creates some anomalies.

Assume a stock gaps down 20% on huge volume. The price oscillates throughout the day and finishes in the upper portion of its daily range, but is still down 18% from the prior close. Such a move would actually cause the A/D to rise. Even though the stock lost a significant amount of value, it finished in the upper portion of its daily range; therefore, the indicator will increase, likely dramatically, due to the large volume. Traders need to monitor the price chart and mark any potential anomalies like these, as they could affect how the indicator is interpreted.

Also, one of the main uses of the indicator is to monitor for divergences. Divergences can last a long time and are poor timing signals. When divergence appears between the indicator and price, it doesn’t mean a reversal is imminent. It may take a long time for the price to reverse, or it may not reverse at all.

The A/D is just one tool that can be used to assess strength or weakness within a trend, but it is not without its faults. Use the A/D indicator in conjunction with other forms of analysis, such as price action analysis, chart patterns, or fundamental analysis, to get a more complete picture of what is moving the price of a stock.

What Is an Acquisition?

An acquisition is when one company purchases most or all of another company’s shares to gain control of that company. Purchasing more than 50% of a target firm’s stock and other assets allows the acquirer to make decisions about the newly acquired assets without the approval of the company’s other shareholders. Acquisitions, which are very common in business, may occur with the target company’s approval, or in spite of its disapproval. With approval, there is often a no-shop clause during the process.

We mostly hear about acquisitions of large well-known companies because these huge and significant deals tend to dominate the news. In reality, mergers and acquisitions (M&A) occur more regularly between small- to medium-size firms than between large companies.

Understanding Acquisitions

Companies acquire other companies for various reasons. They may seek economies of scale, diversification, greater market share, increased synergy, cost reductions, or new niche offerings. Other reasons for acquisitions include those listed below.

As a Way to Enter a Foreign Market

If a company wants to expand its operations to another country, buying an existing company in that country could be the easiest way to enter a foreign market. The purchased business will already have its own personnel, a brand name, and other intangible assets, which could help to ensure that the acquiring company will start off in a new market with a solid base.

As a Growth Strategy

Perhaps a company met with physical or logistical constraints or depleted its resources. If a company is encumbered in this way, then it’s often sounder to acquire another firm than to expand its own. Such a company might look for promising young companies to acquire and incorporate into its revenue stream as a new way to profit.

To Reduce Excess Capacity and Decrease Competition

If there is too much competition or supply, companies may look to acquisitions to reduce excess capacity, eliminate the competition, and focus on the most productive providers.

To Gain New Technology

Sometimes it can be more cost-efficient for a company to purchase another company that already has implemented a new technology successfully than to spend the time and money to develop the new technology itself.

Acquisition, Takeover, or Merger?

Although technically, the words “acquisition” and “takeover” mean almost the same thing, they have different nuances on Wall Street.

In general, “acquisition” describes a primarily amicable transaction, where both firms cooperate; “takeover” suggests that the target company resists or strongly opposes the purchase; the term “merger” is used when the purchasing and target companies mutually combine to form a completely new entity. However, because each acquisition, takeover, and merger is a unique case, with its own peculiarities and reasons for undertaking the transaction, the exact use of these terms tends to overlap in practice.

Acquisitions: Mostly Amiable

Friendly acquisitions occur when the target firm agrees to be acquired; its board of directors (B of D, or board) approves of the acquisition. Friendly acquisitions often work toward the mutual benefit of the acquiring and target companies. Both companies develop strategies to ensure that the acquiring company purchases the appropriate assets, and they review the financial statements and other valuations for any obligations that may come with the assets. Once both parties agree to the terms and meet any legal stipulations, the purchase proceeds.

Takeovers: Usually Inhospitable, Often Hostile

Unfriendly acquisitions, commonly known as “hostile takeovers,” occur when the target company does not consent to the acquisition. Hostile acquisitions don’t have the same agreement from the target firm, and so the acquiring firm must actively purchase large stakes of the target company to gain a controlling interest, which forces the acquisition.

Even if a takeover is not exactly hostile, it implies that the firms are not equal in one or more significant ways.

Mergers: Mutual, But Creates a New Entity

As the mutual fusion of two companies into one new legal entity, a merger is a more-than-friendly acquisition. Mergers generally occur between companies that are roughly equal in terms of their basic characteristics—size, number of customers, the scale of operations, and so on. The merging companies strongly believe that their combined entity would be more valuable to all parties (especially shareholders) than either one could be alone.

Evaluating Acquisition Candidates

Before making an acquisition, it is imperative for a company to evaluate whether its target company is a good candidate.

• Is the price right? The metrics investors use to value an acquisition candidate vary by industry. When acquisitions fail, it’s often because the asking price for the target company exceeds these metrics.
• Examine the debt load. A target company with an unusually high level of liabilities should be viewed as a warning of potential problems ahead.
• Undue litigation. Although lawsuits are common in business, a good acquisition candidate is not dealing with a level of litigation that exceeds what is reasonable and normal for its size and industry.
• Scrutinize the financials. A good acquisition target will have clear, well-organized financial statements, which allows the acquirer to exercise due diligence smoothly. Complete and transparent financials also help to prevent unwanted surprises after the acquisition is complete.

Example of Acquisitions

AOL and Time Warner and AT&T

AOL Inc. (originally America Online) was the most publicized online service of its time, and had been extolled as “the company that brought the internet to America.” Founded in 1985, by the year 2000 AOL had grown to become the United States’ largest internet provider. Meanwhile, the legendary media conglomerate, Time Warner, Inc. was being labeled an “old media” company, given its range of tangible businesses like publishing, and television, and an enviable income statement.

In 2000, in a masterful display of overweening confidence, the young upstart AOL purchased the venerable giant Time Warner (TWX) for $165 billion; this dwarfed all records and became the biggest merger in history. The vision was that the new entity, AOL Time Warner, would become a dominant force in the news, publishing, music, entertainment, cable, and Internet industries. After the merger, AOL became the largest technology company in America.

However, the joint phase lasted less than a decade. As AOL lost value and the dot-com bubble burst, the expected successes of the merger failed to materialize, and AOL and Time Warner dissolved their union:

• In 2009, AOL Time Warner dissolved in a spin-off deal.
• From 2009 to 2016, Time Warner remained an entirely independent company. 
• In 2015, Verizon Communications, Inc. (NYSE: VZ) acquired AOL for $4.4 billion.

Then, in October 2016, AT&T (NYSE: T) and Time Warner (TWX) announced a deal in which AT&T will buy Time Warner for $85.4 billion, morphing AT&T into a media heavy-hitter. In June 2018, after a protracted court battle, AT&T completed its acquisition of Time Warner.

Certainly, the AT&T-Time Warner acquisition deal of 2018 will be as historically significant as the AOL-Time Warner deal of 2000; we just can’t know exactly how yet. These days, 18 years equals numerous lifetimes—especially in media, communications, and technology—and much will continue to change. For the moment, however, two things seem certain:

1. The consummation of the AT&T-Time Warner merger already has begun to reshape much of the media industry.
2. M&A enterprise is still alive and well.

What Is an Acquisition Premium?

An acquisition premium is a figure that’s the difference between the estimated real value of a company and the actual price paid to acquire it. An acquisition premium represents the increased cost of buying a target company during a merger and acquisition (M&A) transaction.

There is no requirement that a company pay a premium for acquiring another company; in fact, depending on the situation, it may even get a discount.

Understanding Acquisition Premiums

In an M&A scenario, the company that pays to acquire another company is known as the acquirer, and the company to be purchased or acquired is referred to as the target firm.

Reasons For Paying An Acquisition Premium

Typically, an acquiring company will pay an acquisition premium to close a deal and ward off competition. An acquisition premium might be paid, too, if the acquirer believes that the synergy created from the acquisition will be greater than the total cost of acquiring the target company. The size of the premium often depends on various factors such as competition within the industry, the presence of other bidders, and the motivations of the buyer and seller.

How Does An Acquisition Premium Work?

When a company decides that it wants to acquire another firm, it will first attempt to estimate the real value of the target company. For example, the enterprise value of Macy’s, using data from its 2017 10-K report, is estimated at $11.81 billion. After the acquiring company determines the real value of its target, it decides how much it is willing to pay on top of the real value so as to present an attractive deal to the target firm, especially if there are other firms that are considering an acquisition.

In the example above an acquirer may decide to pay a 20% premium to buy Macy’s. Thus, the total cost it will propose would be $11.81 billion x 1.2 = $14.17 billion. If this premium offer is accepted, then the acquisition premium value will be $14.17 billion – $11.81 billion = $2.36 billion, or in percentage form, 20%.

Arriving at the Acquisition Premium

You also may use a target company’s share price to arrive at the acquisition premium. For instance, if Macy’s is currently trading at $26 per share, and an acquirer is willing to pay $33 per share for the target company’s outstanding shares, then you may calculate the acquisition premium as ($33 – $26)/$26 = 27%.

Using our price-per-share example, let’s assume that there was no premium offer on the table and the agreed-upon acquisition cost was $26 per share. If the value of the company drops to $16 before the acquisition becomes final, the acquirer will find itself paying a premium of ($26 – $16)/$16 = 62.5%.

Acquisition Premiums in Financial Accounting

In financial accounting, the acquisition premium is known as goodwill—the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process. The acquiring company records goodwill as a separate account on its balance sheet.

Goodwill factors in intangible assets like the value of a target company’s brand, solid customer base, good customer relations, healthy employee relations, and any patents or proprietary technology acquired from the target company. An adverse event, such as declining cash flows, economic depression, increased competitive environment and the like can lead to an impairment of goodwill, which occurs when the market value of the target company’s intangible assets drops below its acquisition cost. Any impairment results in a decrease in goodwill on the balance sheet and shows as a loss on the income statement.

An acquirer can purchase a target company for a discount, that is, for less than its fair value. When this occurs, negative goodwill is recognized.