Merger and acquisition transactions present an opportunity for a seller and buyer to complete a transaction that will benefit both parties. That being said, the objectives of the buyer and seller need to be in alignment for a transaction to close. Finding a proper deal structure is a critical component in promoting the feasibility of a merger or acquisition. Generally, there are two primary structures for M&A transactions: an asset purchase or a stock purchase.
In an asset purchase, the purchaser will provide consideration in exchange for the assets (both tangible and intangible, e.g., goodwill, intellectual property rights, etc.) of the target company. Somtimes, the acquirer will assume selected liabilities of the company.
The assets purchased are at the buyer’s discretion and what buyer and seller agree upon. Most often, all of the assets are acquired and the selling company is left with the consideration, usually cash, and any remaining liabilities. The seller then either changes the name of the company and uses that entity for another purpose or liquidates the entity.
Most of the time, an asset purchase is favored by the buyer as it mitigates the possibility that prior, and perhaps unknown, liabilities from the selling company will be their responsibility. In particular cases, the avoidance of liabilities is not clear cut. For example, in certain jurisdictions, certain liabilities, e.g., environmental issues may penetrate any structure of an M&A transaction.
A stock purchase is much simpler than an asset purchase. The buyer simply purchases the stock of the selling company directly from shareholders in exchange for cash, the acquiring company’s stock, other consideration, or a combination of the three. The corporate status of the target company remains unchanged except that the stock is now owned by the buyer. In this case, the acquirer acquires all of the assets and all of the liabilities of the target company, unless agreed otherwise by the buyer and seller. And, in some cases, if the seller has valuable tax attributes, e.g., tax loss carryforwards, the purchaser may be able to utilize them.
Each structure contains advantages and disadvantages for both companies. The major concerns include tax considerations, liabilities, and the ease of completing the transaction. Other concerns will arise depending on the nature of the industries and companies involved. Typically, both parties will seek the advice of their tax accountants, lawyers, and investment bankers to determine the best and most efficient structure for a particular transaction.
