3.

8 TYPES OF ACQUISITIONS
discussed, acquiring a majority stake
involve ner com
in another company
Acquisitions, as
that the right target is iclende
so that control changes hands. It is imperative for all the a :
ified
or else the process itself can
escalate into a major problem rties
is found, a company maycho
involved. In order to ensure that the right target
between various forms and options.
and 3.8.2.
These forms are discussed in Sections 3.8.1

3.8.1 Assets Purchase

identifiable assets for
Under this method, the acquiring firm purchases specific
to add value to the
the business. These assets are perceived as having potential
also a s u m e specified liabilities. This
acquiring company. In some cases, it may
helpsthe acquiring company to reduce the risk of taking on unknown liabilities
such as seller's contracts, employees, etc.
The acquiring company is keen on the purchase mode as it can acquire the
assets at a comparatively lower price. This potentially reduces future capital gains
tax upon a sale of the assets. In addition, it increases the future depreciation cost,
thereby reducing income tax.
If one evaluates this method from the point of view of the target company,it
typically docs not prefer asset sales method, for the target company has to pay
capital gains tax on the difference between the assets sold and purchase price
allocated to such assets. This could be substantial if assets are heavily depreci-
ated. In addition, if the target company desires to use the proceeds of the asset
sale for paying dividend to the stockholders, dividend would be subject to an
additional tax, thus increasing the burden on the target company. Instead, the
target company prefers selling the entire business, with employees in place and
without the need to wind down the company,
This method suffers from the following limitations:
It requires purchase agreement to allocate purchase price among speCitic
list of assets.
The acquiring company must be assured that all necessary assets are
listed.
Closing the deal is comparatively difficult for the following reasons:
For titled assets such as vehicles and property transferring, the ownersiuP
title of cach asset becomes a tedious task.
 and Acquisitions 95
Mergers

.The consent of the shareholders is

required for each transfer.
I f the entire business is being sold, cach employee must be terminated
a
re-hired by the acquirer. This can crcate a lot of employee benefit issues.

3.8.2 Stock Purchase

Under this method, the acquirer purchases the entire outstanding equity of the

target company. It is a method whereby the acquirer purchases the entire company
and all assets and liabilities of the business that come with it. Stock purchase does

not cause any disruption in the operations which can continue as usual.
This method is popular because of the following reasons:
.Closings are simplified.
and little work is required to transter
Fewer contract consents very paper
specitic assets.
transferred with the stock sale.
All employees and employee benefits are

One needs to take care that if the shares are widely held, a transmittal letter
shares
to facilitate the exchange of their
needs to be distributed to shareholders
of their stock certificates.
for the consideration by delivery incurs
as the target only
by the target company
This method is preferred
stock sold, which is not subject
the difference between basis in
capital gain o n
for stock. In addition, no
dividend has to
to depreciation, and purchase
price
and double taxation
distribute the proceeds of sale to stockholders
be paid to to tackle any issues relating
to
the target is not required
c a n be avoided. Finally,
after closing.
winding up of the company obviously does not prefer
this method
company quite
However, the acquiring liabilities. In addition, it
and
has to inherit
assets
pick and choose and emplovees.
for it cannot
such as seller's
contracts
unknown liabilities
everything, including is potential of a
does not step up. There
assets purchased
The tax basis in the future sale of heavily
depreciated assets although

gains tax o n a
heavier capital reduces the tax
liability.
provision
l o w e r depreciation