The previous write-up examined two common forms of merger and acquisition transactions: Asset Purchase and Stock Purchase. Highlighted below are the advantages and advantages of both transactions.
1. A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization.
2. With an asset transaction, goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In a stock deal, with the acquirer buying shares of the target, goodwill cannot be deducted until the stock is later sold by the buyer.
3. The buyer can dictate what, if any, liabilities it is going to assume in the transaction. The buyer can also dictate which assets it is not going to purchase. If, for example, the buyer determines that the seller has a lot of accounts receivable that are probably not collectible, then they can simply elect not to purchase Target’s AR (accounts receivable).
4. Because the exposure to unknown liabilities is limited, the buyer typically needs to expend less time and money, and fewer resources, on conducting due diligence.
5. Minority shareholders who don’t want to sell their shares can effectively be forced to accept the terms of an asset sale. Unlike the case with a stock purchase, minority shareholders do not ordinarily have to be taken into account in regard to an asset purchase.
6. The buyer can select which employees they want to retain (and which they do not) without impacting their unemployment rates.
1. Contracts – especially with customers and suppliers – may need to be renegotiated and/or renovated by the new owner. Assignable contract rights may be limited.
2. The tax cost to the seller is typically higher, so the seller may insist on receiving a higher purchase price.
3. Assets may need to be retitled.
4. Employment agreements with key employees may need to be renegotiated.
5. The seller still needs to liquidate any assets not purchased, pay any liabilities that have not been assumed, and take care of any leases that need to be terminated.
1. The acquirer doesn’t have to bother with costly re-valuations and retitles of individual assets.
2. Buyers can typically assume non-assignable licenses and permits without having to obtain specific consent.
3. Buyers may also be able to avoid paying transfer taxes.
4. More simple and commonly used than an asset acquisition. Hedge funds are known for commonly conducting M&A transactions in the form of a simple stock purchase.
1. The main disadvantage is that an acquirer receives neither the “step-up” tax benefit nor the advantage of handpicking assets and liabilities.
2. All assets and liabilities transfer at carrying value.
3. The only way to get rid of unwanted liabilities is to create separate agreements wherein the target takes them back.
4. Applicable securities laws, of course, have to be dealt with, and this can complicate the process, especially when the target has a lot of shareholders. Additionally, some shareholders may not wish to sell their stocks, and this can drag out the process and increase the cost of acquisition.
5. Goodwill is not tax-deductible when it exists in the form of a share price premium.