How to Decide between a Share Acquisition and an Asset Acquisition

In September 2013, Microsoft announced that it had acquired Nokia’s devices, services, patents and licenses for a total of €5.44 billion in cash.

With so much of Nokia being tied up in its phones and patents, you might be forgiven for wondering why Microsoft didn’t just buy the company outright.

When buying a business, the decision whether to structure the transaction as an asset purchase or a purchase of common stock is an extremely important consideration.

On the surface, many company acquisitions appear to be straight common equity purchases until further investigation reveals that the buyer has just purchased the target’s assets and selected liabilities.

If you were to type “[company name] acquired the assets” into Google, you’d find it’s remarkable how many companies aren’t acquired at all - their assets are (Microsoft seems to have a particular preference for this form of transaction).

Below we outline some of the differences between both and in which circumstances each should be chosen.

Note that this article takes the perspective of a buyer rather than a seller, each of which will benefit differently in each form of acquisition.

The Pros of a Stock Purchase

• The major advantage of a straight stock purchase is its simplicity: there is no retitling of various assets and consent doesn’t have to be acquired from existing clients to continue contracts, as they’re included with the acquisition. 
• There are possible transfer tax benefits that arise in a common stock purchase, which don’t usually arise in asset purchases.
• Common stock purchases are usually an easier pitch to sellers than asset purchases: they don’t want to be left with the downside any more than you do. 

The Cons of a Stock Purchase

• Despite potentially gaining from transfer taxes, the buyer won’t gain the ‘step up’ tax benefit that comes with an asset purchase - this is the readjustment that occurs when an asset is revalued upward.
• Buyers have to pay for goodwill as part of the transaction and this isn’t tax deductible.
• If the company is of sufficiently large size, you may have to deal with smaller shareholders, some of which may not want to sell their shares.

The Pros of an Asset Purchase

• While a stock purchase is more simple in some ways, it does (or should) involve a considerable amount of due diligence. Much less due diligence will be required with an asset purchase as there will be fewer ‘unknowns’ involved with the acquisition.
• As mentioned in the previous section, an asset purchase allows the buyer to take advantage of ‘step up’ tax benefits
• Minority shareholders are much less of an issue when acquiring an asset, the sale of which is a management decision.
• In theory, with an asset purchase, buyers can pick and choose which assets they wish to acquire, minimizing their exposure to downside risks.

The Cons of an Asset Purchase

• As the seller of an asset will typically have to pay substantial capital gains taxes, they’re likely to ask for a significant premium on the value of an asset.
• Some assets (e.g. buildings) will have to be retitled.
• If part of the asset being required is human capital (i.e. employees), these employment contracts will have to be renewed and/or renegotiated.
• Similarly, contracts with customers, where they exist, will need to be renewed.