Mergers and Acquisitions are part of the business industry. In order to perform well, businesses need to restructure themselves. Mergers and Acquisitions benefit the companies involved in some or other ways. The acquiring companies get the assets or properties from the acquired companies. The acquired company, in turn, earns cash or debt settlements.
Mergers and Acquisitions can have a huge impact on the market and future of the companies and employees involved. In this article , we will focus on understanding the details of Acquisitions and its types.
What is Acquisition?
Acquisition in simple terms can be defined as one company buying out another one. Generally, bigger companies acquire smaller companies that can be incorporated in the main company or can work as a subsidiary of the acquiring company. In acquisitions, similar to some type of mergers, the acquiring company can buy another smaller company with cash or stock and sometimes both. Acquisitions can be of following types:
1) Asset Acquisitions: In an asset acquisition, the acquiring company individually selects the assets or liabilities it wants to purchase. This way the acquirer can avoid buying assets that are not beneficial for them. In an asset acquisition, all the assets are individually evaluated and valued. The asset purchase agreement in these types of acquisition list out all the assets the acquiring company chooses to buy along with its valuation. The acquiring company can choose assets as per its requirement starting from the office supplies to goodwill. Evaluating each individual asset can be a tedious task with lots of time, efforts and costs involved. Also, assets like important government deals cannot be easily transferred or acquired without approval from the business partners and the government authorities.
2) Stock Acquisitions: In stock acquisitions, all the stocks or the liabilities of the acquired company are transferred to the acquiring company without any individual valuation. As no complex valuation of each asset is involved this type of deal is much simpler compared to the asset acquisition. The acquiring company does not get a benefit in tax for each individual asset but it is calculated on a carry-over basis. Also, the goodwill generated in this type of acquisition is not tax deductible.
Although in stock acquisition the buyer has to purchase all the stocks or the liabilities from the acquired company, the buyer can return or resale the unwanted assets or liabilities back to the company under a contract. Tax consequences for both asset and stock acquisitions can be different.
Reasons for Mergers and Acquisitions: Mergers and Acquisition even though can be tedious and time-consuming they are sometimes essential to be carried out. There could be various reasons that the companies or businesses need to go for a merger or acquisition. Few of the reasons are as listed below:
- Economies of scale
- Economic synergy for inexpensive cost of funds
- To increase market portion and by giving extensive market access
- Tax compensations
- Broadening products or markets for higher growth
- Reducing risk by expanding the business.
- Necessary realignment and technological change
- Increasing company’s performance and expedite growth
- Undervalued target