Interview Question that I was just asked... Please help! - Explanation?
Just got off the phone with a managing partner of an international investment bank. The follow is what he asked me:
Let's say an acquirer wants to purchase a target company with cash, why would the acquirer want to purchase the target's assets/liabilities, instead of its stock. He said you are buying the company with cash, writing the same check amount, but instead of purchasing 100% of its stock, you prefer the targets assets/liabilities. Why?
Can someone please answer this? He gave an explanation of the reasons he wanted to hear and it seemed very complex, especially at my level. Thanks!
http://www.bizquest.com/resource/basic_deal_structures__stock_purchase_vs_asset_p-23.html
When in doubt, the answer is "taxes".
If you buy equity, you're buying the company's assets and liabilities. But the assets only and you can avoid the liabilities. Asset only structure can be preferred where you don't need to take the liabilities or some other aspects of continuity to continue the business.
http://macabacus.com/accounting/types-of-acquisitions
there's 3 different ways the acquirer could purchase a target - cash, stock, or debt and generally: 1) cash is cheaper than debt BC interest rates on cash are usually under 5% whereas debt is typically much higher (therefore, forgone interest on cash is almost always less than the additional interest paid on debt for the same amount of cash or debt) 2) cash is less risky than debt because there's no chance the buyer might fail to raise funds from investors 3) cash is less risky than stock because the buyer's share price could change pretty dramatically once the acquisition is announced
He's asking about the type of transaction (stock vs. asset purchase), not the type of consideration used
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