Asset Acquisition

The sale of agreed-upon assets and/or liabilities from one company to another

Asset Acquisition, also known as an asset purchase, is the sale of agreed-upon assets and/or liabilities from one company to another. This acquisition strategy provides increased flexibility and reduced risk to the acquiring company.

Asset Acquisition

Asset purchases are not the same as a stock acquisition where financing is exchanged for a company. Asset sales can be more complex due to the time demands to go over each asset and liability available.

Types of Acquisitions

A buyer's acquisition strategy is based on specific needs or wants from that acquisition. Depending on who a buyer seeks to acquire, there are a variety of acquisition strategies that can be executed. Presented below are some of the most common strategies. 

1. Mergers

A typical merger requires The Board of Directors at both companies to agree to terms. They also must seek approval from current shareholders before combining the companies into one. For example, Compaq is a company that merged with Hewlett-Packard. 

Compaq had a previous ticker of CPQ, which after merging with Hewlett-Packard (HP), changed to HPQ. After connecting with Hewlett-Packard, both firms' business operations and management were combined with the creation of HPQ.

2. Standard Acquisition

Standard acquisition occurs when a company purchases a majority stake in another company. The original name and business structure do not change but instead usually stay the same. 

For example, company X manufactures and sells vehicle wheels, while company Y manufactures and sells cars. Company Y is trying to reduce overall costs and has decided ownership of its wheel manufacturing operation will reduce car production costs. 

Company Y purchases Company X. In this acquisition strategy, company X retains its name, management, and business operations as it had before. The only change is the structure of ownership which is now under Company Y.

Contract

3. Consolidation

Consolidation occurs when several organizations combine into a larger corporation. A company assumes business operations within a company and rejects previous corporate structures.

This acquisition strategy requires approval from current stakeholders of the acquired firm and that these stakeholders are to receive common equity shares in the new firm. As a result, many of the world's largest companies today were created with business consolidation.

For example, Facebook acquired Instagram to further promote the company's presence on social media. Another example is the acquisition of Fox by Disney.

4. Purchase mergers

Purchase mergers occur when a company offers cash or an instrument of debt to buy out a company. The sale of a company is taxable, providing tax benefits to buyers. The sale can also produce write-offs for acquired assets in the deal.

An example of a purchase merger is the acquisition of Android in 2005 by Google. Google acquired Android for an estimated $50 million in a private deal to take ownership of Androids operations. 

Another example of a popular purchase merger is the 2007 acquisition of Pixar by Walt Disney Co. In a 7.4 billion dollar deal, Walt Disney took ownership of animated productions put out by Pixar, such as Wall-E, Finding Dory, and Toy Story 3.

5. Asset Purchase

Asset purchase occurs when the buyer acquires specific assets and liabilities from a company. These sales are common in bankrupt companies looking to liquidate with approval from the company's shareholders.

Key

Understanding Asset Acquisition

Acquisition strategies can provide growth and exposure to existing companies. The acquisition process can lead to economies of scale, new market presence, or even new market penetration. There are many types of acquisitions possible, the most flexible being asset acquisition.

There are many reasons a company would choose the asset acquisition approach instead of a typical merger or stock buyout. Increased flexibility and a risk-reduced deal are the main factors.

A buyer can pick specific assets and liabilities to reduce risk from undisclosed assets and liabilities. They also have the flexibility to pick and choose particular assets and liabilities from a selling company. 

For example, a paper manufacturing company, Company P, is for sale. This company owns paper manufacturing machines and operations. This company is close to bankruptcy and wants to figure out how to liquidate. 

Company W is a pencil manufacturing company that has been deciding to enter the paper manufacturing market using existing operations, machinery, and location, preferably through an acquisition. 

Company W decides to purchase Company P's paper manufacturing assets, such as its production machines, processes, and other items. The buyer does not assume the selling company's debts and non-paper-related assets.

In this scenario, Company W acquires specific decided-upon assets from Company P in an acquisition. The buyer only acquired paper-producing related assets and did not assume any of the selling company's debts.

Factors used in Asset Acquisition

There are many factors used in asset acquisition that need recognition. An asset purchase is a tool that companies can use to increase sales and market penetration. Acquiring certain assets and liabilities result in increased flexibility. 

These deals are also complex and time-intensive as the buyer has to go over each asset and its respective liabilities along with the analysis of which assets to acquire.

Assets

Risk-averse - A large factor within asset acquisition is to reduce the buyer's risk. This acquisition strategy is most prevalent in bankrupt companies. A company can buy assets deemed beneficial and not incur debts held by bankrupt companies.

Reducing bad debts and undisclosed liabilities minimizes the risk and potential for loss for the buyer. Risk is also reduced by being able to acquire specific assets that have the potential to generate increased operations or improve economies of scale within a company. 

Assets contribution to existing cash flowAcquired assets must also be able to complement current business operations. A great starting point is how the asset can benefit a buying company's earnings per share (EPS), cash flow, or other financial targets.

Acquired assets can be chosen for the main purpose of increasing overall production capacity, earning potential, and expansion opportunities without the risk of acquiring additional unnecessary liabilities and assets from a business.

Accounting for Asset Purchase -Asset Purchase in accounting requires the buyer and selling company to agree on how the price of their deal is to be allocated to each asset. 

The Residual Method is suggested for use by the United States Internal Revenue Code, which allocates purchase prices to each assumed asset according to its fair market value.

Any remaining balance is to apply to goodwill. If liabilities are assumed, they are to be recognized at a fair value basis. To account for this change in ownership, the Internal Revenue Service also requires Form 8594.

This form recognizes the total acquisition value and the independent values of each asset and its classes. The seller and purchases must include any goodwill and any bias towards asset purchases.

Why use Asset Acquisitions

Buyers looking for flexibility or specific parts of companies are more likely to use this strategy. A few reasons companies might lean towards acquiring particular assets and liabilities include:

  • Reducing risk. It is essential to reduce as many large debts and liabilities acquired. Choosing which liabilities to assume decreases business risk. It also decreases the potential downside to investments coming from undisclosed debts.
  • Acquiring specific assets can provide an increased Economy of Scale. Depending on the acquisition, this increase can be within a service or product line.
  • In rare cases, companies can use this acquisition strategy to take control over target companies. Acquiring key assets within a company creates increasing dependability on the existing business. 
  • This dependability tends to grow over time resulting in complete dependability to operate. This most commonly ends with a full acquisition or merger.
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Example of Asset versus Stock Acquisition

Stock

  • The social networking platform LinkedIn was acquired in a stock acquisition by Microsoft. Microsoft offered LinkedIn 196 dollars per share for a total of 26 billion dollars.

  • In this case, Microsoft purchased the entirety of LinkedIn and its shares.

  • In this case, Microsoft acquired LinkedIn by purchasing its stock. This acquisition strategy provided Microsoft with complete ownership over LinkedIn. This ownership provided Microsoft with all assets and liabilities from LinkedIn.

Asset

  • Company X participates in the ready-mix industry, manufacturing and transporting concrete.

  • Company Z operates and participates in the production of large commercial vehicles. Company Z has 50 million dollars in assets. This value spreads across large semis, dump trucks, and concrete mixing vehicles. Company Z also has 15 million dollars in debt.

  • Company X purchases 10 million dollars in cement vehicle production facilities (assets). Company X also purchases 3 million dollars in liabilities (existing accounts payable for the trucks) from the company

  • Company X now has ownership and control of the semi-facility. This can increase  X's economies of scale without having to acquire the extra $40 million in assets and $12 million in debt from company Z.

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Researched and authored by Colt DiGiovanni | LinkedIn

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