Stock Acquisition

What is a Stock Acquisition?

Acquiring an existing company is simpler than starting one from scratch. When buyers purchase the target company's stock, they accept it. This may be accomplished through friendly talks with management or a takeover bid.

Although the two organizations are legally separate, the buyer now controls one as a subsidiary. 

After acquiring its stock, the buyer receives authority over the target's assets and liabilities. Still, the net assets remain in the target firm and aren't physically transferred to the buyer because only ownership is transferred. 

Since both are regarded as business combinations, all assets and liabilities are stepped up to their fair value, as explained above for legal mergers.

A stock acquisition includes both the assets and liabilities on the balance sheet. This can be a wise decision if the buyer needs a tax deduction.

Since a stock sale entails purchasing the entire company, the buyer is exposed to enormous prior financial and legal obligations. Therefore, financial debt and legal danger may contribute to a decrease in the sale's purchasing price.

A buyer may consider a stock acquisition if they believe that the company's stock has room to rise in value or that its existing and future liabilities are manageable or modest. 

Suppose the transfer of individual assets could be difficult or expensive. In that case, the buyer might choose a stock sale because they receive all of the company's assets without transferring ownership of each individual.

What Are Stocks?

Before digging deep into what stock acquisition is, let's first have more information about stocks in general.

You are said to own stock or equity when you possess a portion of the issuing corporation. Units of equity are referred to as shares. According to the total number of shares, one stock indicates a piece of ownership in the company.

Most individual investors' portfolios are built on stocks, mostly bought and sold on stock exchanges. Government regulations designed to protect investors from fraudulent practices are followed during stock trades.

To avoid fraud, safeguard investors, and promote the overall economy, governments often impose strict regulations on the buying and selling of stock, whether done privately or on stock exchanges.

The depositories receive the stocks electronically, often known as a "Demat account." When a company issues additional shares in exchange for cash to support or grow the business, the ownership and rights of current shareholders are diluted.

Companies can also repurchase stock, frequently enabling investors to recover their initial investment and capital gains from later stock price increases.

So, the stock is a colloquial phrase for any company's ownership certificates. On the other hand, a share alludes to a certain company's stock certificate. You become a shareholder if you possess shares of a specific corporation.

What differs from an asset purchase from a stock purchase?

Asset and stock purchases may appear similar, but this is not the case. The buyer purchases specified assets and liabilities in an asset purchase. This implies they merely take on the associated risks with those specific assets.

Equipment, fixtures, furnishings, licenses, trade secrets, trade names, accounts payable and receivable, and other assets may be included.

The former firm (with any assets or obligations it still owns) must be shut down when an asset acquisition is complete, and the acquired assets and liabilities are transferred to the new corporation.

A stock acquisition involves the buyer acquiring the whole company, including its assets and liabilities.

Below we can clarify the difference between an asset and a stock purchase by their advantages and disadvantages:

Advantages Of An Asset Purchase

An asset purchase has five major benefits addressing mainly the purchaser, including:

1. The buyer may choose which liabilities to take on in an asset purchase while excluding others. Consequently, purchasers have more freedom. In contrast, a stock acquisition entails the buyer acquiring equity in a company with unexpected or uncertain obligations.
2. The buyer can "step up" the tax value of assets and reduce or amortize them if the purchase price exceeds the total tax basis of the assets being acquired.
3. The buyer can still purchase assets even if a few shareholders refuse to sell their shares. 
4. Because the parties are typically not required to abide by state and federal securities rules and regulations, purchasing a business through an asset acquisition is less complicated from a securities law perspective.
5. For tax purposes, the buyer can amortize goodwill over fifteen years.

Disadvantages Of An Asset Purchase

It is thrilling when a business has advanced to the level where it is considering the acquisition of another asset. But before proceeding, let's check the disadvantages:

1. Purchases must be retitled with the new buyer's name.
2. In a stock transaction, the buyer often has the right to acquire non-assignable contracts, permits, and licenses from the selling business without the other party's approval.
3. Asset acquisitions are not considered tax-free restructuring for purposes of taxation.
4. A stock transaction will often be simpler if the selling business has few stockholders.
5. A stock transaction can avoid part or all of the sales or transfer taxes that would be due in the case of an asset transaction in jurisdictions where these taxes are levied on the sale of assets.

Tax Limitations

Acquisitions can often be made by selling assets or stocks.

In a taxable stock acquisition, the buyer purchases stock from the target company's owners, who are subject to tax on the difference between the purchase price and the value of their outside holdings in the target's stock.

The Bulk Sales Act does not apply to stock purchases. The buyer assumes the asset depreciation schedule and the corporation's current tax position in a stock transaction. Personal obligations and loans to the owner are typically eliminated.

A stock sale may be required when a right, license, or exclusive distributorship cannot be transferred in any other way.

There are no tax implications associated with the allocation of the purchase price. Accordingly, for tax purposes, the tax characteristics of the assets and liabilities in a stock acquisition receive a carryover basis.

The buyer assumes the role of the target and continues to account for the assets and liabilities as if the target had not changed ownership, which is what is meant by the term "carryover basis."

If goodwill or any other intangible asset is recognized for Generally Accepted Accounting Principles (GAAP) purposes in a stock transaction, it has no basis for tax purposes.

Other tax characteristics of the target, including net operating losses or credit carryovers, can be constrained in the hands of the purchaser.

The owner is considered to sell a capital asset when they buy shares. Any profits will be subject to capital gains tax, normally assessed at a rate between 0 and 23.8%, depending on the owner's income.

Top Stock Acquisition Examples

Every year, more acquisitions occur worldwide. The most typical acquisition kinds are described in the following examples:

Amazon Acquires Whole Foods Market

The most valuable listed company in the US sector monopolists is Amazon, one of the first and biggest e-commerce enterprises in the US and the globe.

In terms of financial gains or the following growth of the two, Amazon's acquisition of Whole Foods is unquestionably one of the most successful situations of the 2010s.

Due to their complementary demands, Amazon and Whole Foods have made a double-win collaboration one of their development objectives.

The largest fresh and organic food company in the United States revealed on the evening of June 16, 2017, Beijing time that Amazon, the biggest e-commerce platform in the country, had bought it.

Whole Foods was purchased for $13.7 billion (including its net debt) for $42 and closed in 2017.

Microsoft And LinkedIn

To provide its clients with a wider choice of services, Microsoft decided to step up its efforts in the application and service segment, particularly by expanding its offerings in the productivity area.

Microsoft decided to purchase LinkedIn and start the biggest deal in its M&A history following this shift in strategy.

In a $26 billion agreement, Microsoft acquired LinkedIn for $196 per share, winning the acquisition against Salesforce.com, Inc. After the news was released, LinkedIn's stock increased by 64%.

All of LinkedIn's net cash was included in the all-cash transaction. It is a 50% premium over LinkedIn's most recent closing price of $9 billion. In addition, Microsoft paid 25% less for LinkedIn than it did at its peak.

What are the Types of Acquisitions?

There are several acquisitions based on the relationship between the buyer and seller, each with a unique purpose. Here are four typical acquisition kinds and the business applications for each.

1. Vertical Acquisition: Typically, vertical acquisitions occur when a business buys out one of its suppliers. Due to the consolidation of several manufacturing steps into a single site, this technique enables ongoing reductions in production costs.
2. Horizontal Acquisition: Horizontal acquisitions are when a company acquires another company that offers similar or the same products. The assets and liabilities of those two businesses are merged to create a single industry.
3. Conglomerate Acquisition: When a firm acquires another from a different industry, it is known as a conglomerate acquisition.In addition to introducing new markets, the benefits include minimizing unreasonable risks and eliminating unnecessary tasks.
4. Market Extension Acquisitions: Corporations purchase other businesses in their sector that sell comparable or identical goods. However, since they are a part of other marketplaces, they are not competitors.

• The purposes of acquisitions are illustrated below:
  • Enhancement in Target's Performance: Private equity players typically carry out this activity and invest extensively in the targets because they anticipate large gains from them. This strategy thus entails great risk and tremendous payoff. In addition, it involves austerity tactics like cost reduction and margin expansion.
  • Eliminate Duplication: Certain elements of a firm that is bought will overlap with those that the acquirer already possesses, which reduces earnings. The acquirer wants to eliminate this duplication and increase the target company's profitability and the combined profits of the two businesses.
  • Utilize knowledge and technology: Instead of creating it internally, acquiring new technology and knowledge from the target firm is preferable to avoid the emergence of rivals.

What are Mergers and Acquisitions (M&A)?

Mergers and acquisitions (M&A) term refers to combining two businesses. It is a financial agreement between corporations that merges companies or their primary commercial assets.

1. A firm may buy and absorb another company
2. Merge with it to form a new company
3. Acquire some or all of its significant assets
4. Make a tender offer for its stock
5. Launch a hostile takeover.

When M&A is effective, it promises value for both the buyer and seller. Below are some examples of common mergers and acquisitions.

1. Acquisition: The acquiring corporation receives a majority shareholding in the acquired firm, which maintains its name and organizational structure.
2. Merger: A merger occurs when two firms combine their resources, assets, and liabilities.
3. Consolidation: Business consolidation is the merger of many business divisions or firms into a single, bigger company.
4. Tender Offers: An investor, or group of investors, makes a conditional offer to purchase all of the shareholders' stock. The tender offer is typically higher than the publicly traded company's market value, allowing shareholders to cash out with higher profits within a set time limit.
5. All-Cash, All-Stock Offer An offer to buy all of the outstanding shares of another firm from its owners for cash is known as an all-cash, all-stock offer.
   • One way to complete an acquisition is with an all-cash, all-stock offer. The acquiring company can make the deal appear attractive and try to convince uncertain shareholders who are about to accept the purchase by offering a premium over the price of the already traded shares.

Researched and authored By Sara Nasrallah | LinkedIn

Reviewed and Edited by Raghav Dharmarajan

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Transaction Risk
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