- 1. Market Perception
- What Is the Difference Between an Asset Purchase and a Stock Purchase Acquisition?
- What Is a Stock Purchase Acquisition?
- What Are The Benefits and Drawbacks of a Stock Purchase Acquisition?
- What Is an Asset Purchase Acquisition?
- What Are the Benefits and Drawbacks of an Asset Purchase Acquisition?
- What’s the Right Type of Acquisition For You?
When selling or buying a company, you have two options: a stock purchase acquisition or an asset purchase acquisition. When you first incorporate your company, you must issue stock (sometimes called equity or shares), even as an S Corp, but you don’t have to sell stock when you sell your business – you could sell your assets instead.
What does this mean? Rather than sell all the equity in your business, you’d instead sell things like its web domain, intellectual property, equipment, and so on. You can only sell your assets on Acquire.com. And while that does impact tax, legal liability, and other aspects of your acquisition, you might want to consider its benefits over a stock sale in our comparison below.
And if you determine that an asset purchase acquisition is the right path for you, Acquire.com is here to help every step of the way.
What Is the Difference Between an Asset Purchase and a Stock Purchase Acquisition?
Before diving into both types of acquisitions, here’s a quick overview of what an asset acquisition versus stock acquisition means:
- In a stock purchase, the buyer acquires company stock, becoming a shareholder with interest in its assets and liabilities. The acquired company does not change, but its ownership does.
- In an asset purchase, the buyer acquires company assets (for example, property, equipment, inventory, and customers) but not the legal entity. The seller typically retains any liabilities and the company’s equity.
What Is a Stock Purchase Acquisition?
Let’s say you’re a buyer. A stock purchase acquisition means buying a company’s outstanding stock (stock currently held by its shareholders) and not its assets.
The percentage of stock you purchase depends on your agreement with the seller. You might buy all of the company’s outstanding stock, becoming the sole owner of the company. Alternatively, you can buy only a portion, becoming a partial owner of the company, and most likely a majority shareholder who has voting rights over the company’s direction.
Either way, in a stock purchase acquisition, the employees, assets, and contracts remain the property of the acquired company. However, you will now have a vested interest in the assets and liabilities of the company you bought.
Real-Life Examples of Stock Purchase Acquisitions
Here are some examples of stock purchase acquisitions.
Microsoft Acquires ByteDance
In 2020, Microsoft announced the acquisition of TikTok’s parent company, ByteDance. This was a stock purchase acquisition where Microsoft acquired all of the outstanding stock of ByteDance, making it the new owner.
By acquiring all of ByteDance’s stock, Microsoft gained control of TikTok’s technology and engineering talent and could integrate them into the Microsoft portfolio of products. It was part of Microsoft’s larger strategy to expand its presence in the rapidly growing social media market and stay competitive with other tech giants such as Facebook and Google.
Amazon Acquires Whole Foods
Similarly, in 2017, Amazon bought Whole Foods for $42 per share, valuing the company at $13.7 billion. With the ecommerce giant becoming the owner of Whole Foods, Amazon was able to move into brick-and-mortar stores. It also incentivized people to sign up for Amazon Prime since grocery delivery became part of the deal.
What Are The Benefits and Drawbacks of a Stock Purchase Acquisition?
Pros
- Simplicity: Stock purchase acquisitions are typically less complicated than asset acquisitions as you only need to purchase the target company’s stock. You don’t have to bother with costly re-valuations and retitles of individual assets.
- Easier transfer of ownership: By acquiring company stock, you assume all of the target company’s liabilities and obligations, making it easier and quicker to transfer ownership and control.
- Continuity of business: A stock purchase allows the target company to continue operating as a separate legal entity, which can provide stability for employees, suppliers, and customers, and help maintain the target company’s brand and reputation.
- Avoidance of regulatory approval and fees: In some cases, you can complete stock purchase acquisitions without regulatory approval because it’s a transfer of ownership, not a merger or acquisition of assets. For example, if you’re acquiring a small company in a non-regulated industry, you can usually avoid its approval and transfer fee requirements.
- No need for consent: In a stock purchase, you don’t need to obtain the consent of individual creditors or other parties that may hold claims on the company’s assets.
Overall, a stock purchase acquisition can be a simpler option for acquiring companies (compared to an asset acquisition) – and you may be able to avoid the legal and regulatory hurdles associated with buying individual assets of another company.
Cons
- Cost: Stock purchase acquisitions can be more expensive than asset acquisitions, as you need to purchase all of the outstanding stock (or most of it to gain a controlling interest) of the target company rather than specific assets.
- Risk assumption: By acquiring company stock, you assume its liabilities and obligations, including any hidden or unknown ones. For example, if you acquire a company that has pending lawsuits, regulatory issues, or outstanding debts, you would assume responsibility for these liabilities (even if the seller didn’t disclose them at the time of the acquisition).
- Lack of control over specific assets: In a stock purchase acquisition, you can’t cherrypick the assets you want, limiting your ability to optimize an acquisition by only buying the most valuable assets.
- Shareholder opposition: Some shareholders may not want to sell their stock or not agree with the terms of the deal, which can drag out the process and increase the cost of acquisition.
- Difficulty integrating employees: You need to integrate employees from the acquired company with your own (assuming you have any), which can be challenging. The newly-acquired employees may have different cultures, processes, and ways of working that don’t align with your practices. This can lead to misunderstandings, resistance to change, and employee conflict.
Overall, a stock purchase acquisition can involve higher risk and cost compared to an asset purchase acquisition. Consider these factors when deciding whether to pursue a stock purchase.
What Is an Asset Purchase Acquisition?
An asset purchase is where you only buy certain company assets rather than the company’s assets and liabilities as you would in a stock acquisition. Assets can be tangible (physical) such as real estate, inventory, machinery, and equipment, or intangible such as software, patents, trademarks, and customer relationships.
The goal of an asset purchase is to either acquire complementary assets or to effectively acquire a company without also assuming its liabilities. If you acquire all of the assets that make the company functional, the surviving legal entity will usually wind down as it no longer serves a purpose. In this sense, an asset purchase is a low-risk means of acquiring companies.
Real-Life Examples of Asset Purchase Acquisitions
Here are a couple of examples of real-life asset purchase acquisitions.
Verizon Acquires Tracfone Wireless, Inc
In 2019, Verizon announced the acquisition of Tracfone Wireless Inc., a leading provider of prepaid wireless services in the US. This was an asset purchase acquisition, as Verizon only acquired Tracfone’s customer base and retail distribution network. Verizon did not acquire Tracfone’s liabilities and obligations, and the company continued to operate as a separate entity after its acquisition.
This asset purchase acquisition allowed Verizon to reach more customers, expand its prepaid wireless services, and widen its footprint in the prepaid wireless market.
Arris Group Acquires Motoroloa’s TV Cable Box Division
Another example is the acquisition of Motorola’s TV cable box division by Arris Group in 2012. In this acquisition, Arris purchased the cable box assets and intellectual property of Motorola for $2.35 billion. This allowed Arris to integrate Motorola’s technology into its products and expand its market share in the cable industry.
Series A Recruitment Startup Acquires Tech Pod
On a smaller scale, two founders sold their newsletter company, Tech Pod, on Acquire.com by focusing on its intangible assets. Financial buyers are interested in hard stats, but strategic buyers often pursue not-so-quantifiable features. In this case, Joseph Choi, cofounder of Tech Pod, focused on brand loyalty and customer testimonials over open and click-through rates.
Why? The engaged audience of over 10,000 subscribers was worth more to his buyer, a Series A recruitment startup, than any other assets. It wasn’t just a newsletter with good engagement metrics, but a brand that their subscribers truly trusted and cared about. The buyer was acquiring customers that could collectively be worth several times what they paid for Tech Pod.
What Are the Benefits and Drawbacks of an Asset Purchase Acquisition?
Pros
- Flexibility in negotiations: In an asset purchase acquisition, you have direct control over which assets you want to buy. You can cherrypick the specific assets that will benefit you or your business.
- Limited liability: By only acquiring specific company assets, you’re not assuming all of the target company’s liabilities and obligations, such as loans, mortgages, accounts payable, or accrued expenses. This can reduce your risk of buying undisclosed or unknown liabilities.
- Cost savings: Asset purchase acquisitions can be less expensive than stock purchase acquisitions as you only purchase specific assets, not all of the company’s stock.
- Tax benefits: In some cases, asset purchase acquisitions can offer tax benefits where you write off the cost of the assets over time.
- Better control over the workforce: In an asset purchase acquisition, you choose which employees to retain, resulting in a more efficient and cost-effective workforce.
Overall, an asset purchase acquisition can offer you greater control over specific assets and reduce the risk and cost associated with acquiring a company compared to a stock purchase acquisition.
Cons
- Complexity: Asset purchase acquisitions can be more complicated and time-consuming than stock purchase acquisitions because you’re acquiring specific assets and not the whole company. This means you and the seller need to determine a fair value for each asset and liability and agree on the price for each.
- Limited liability assumption: By only acquiring specific company assets, it can make it more difficult to transfer ownership and control.
- Need for regulatory approval: Sometimes, asset purchase acquisitions need regulatory approval. Certain industries, such as finance, telecommunications, healthcare, and energy, have regulations that require government agency approval before you can complete an asset purchase.
- Conflicts with creditors: You may conflict with creditors of the company you want to acquire if they have claims on the assets.
- Renegotiation of contracts: You may need to renegotiate or renew contracts with customers, suppliers, and employees.
While asset purchases involve many moving parts, Acquire.com is here to make things easier for you. We can help you smoothly transfer assets by understanding how to isolate acquisition assets, ensure they’re transferable, and assign them to the asset purchase agreement (APA). With our APA Builder, you can also draft an asset purchase agreement in minutes, eliminating all the usual complexity associated with an asset purchase.
What’s the Right Type of Acquisition For You?
As a buyer, the type of acquisition that’s right for you will depend on your strategic goals, the financial condition of the target company, and the assets you’re interested in acquiring.
On the one hand, a stock purchase acquisition can be attractive if you’re interested in acquiring the entire business, including all of its assets and liabilities. This can be a more efficient and straightforward way of completing an acquisition, as you only need to negotiate the purchase of the stock, instead of each asset individually.
On the other hand, an asset purchase acquisition can be attractive if you’re looking to acquire specific company assets such as intellectual property, equipment, or real estate. This type of acquisition will also help you avoid acquiring the “bad stuff” of said company. Our technology and in-house advisors can also help eliminate the uncertainty over the acquisition process.
As a seller, you may lean towards either a stock purchase or an asset purchase acquisition depending on your objectives and your company’s financial condition.
An asset purchase acquisition is helpful to buyers because they can acquire your business without its liabilities, which minimizes the risk of nasty surprises post-sale. Once you’ve sold your assets you can wind down the surviving entity and move on to new endeavors.
Asset acquisition is also the way to go if you’re looking to sell specific assets, such as a particular product line or a subsidiary. In other words, you only sell what you want to sell, providing you with more control over the acquisition while retaining the rest of your company.
Finally, an asset purchase allows you to keep certain details of your business confidential, as you choose which assets to make publicly available and which to keep. This can be beneficial if you want to maintain the privacy of certain business operations or intellectual property.
Whether you’re a buyer or seller, carefully consider your options and seek the advice of professional advisors to help you make the best decision for your situation. Acquire.com can provide expert guidance and support throughout the asset purchase acquisition process, helping you navigate the transaction’s complex legal and financial aspects.
Sign up for your seller or buyer account today.
How Do You Record Stock Purchase Acquisitions?
The process of recording stock purchase acquisitions in your company’s financial records involves several steps:
- Determine the cost of the stock: Include any fees or commissions related to the transaction in the final price.
- Update your company’s balance sheet: Reflect the stock acquisition by increasing its assets and increasing its liabilities or equity, depending on the type of financing you used to purchase the stock.
- Record the transaction: You need to record the stock purchase transaction in your company’s general ledger. The journal entry will typically involve a debit to the cash account and a credit to the stock or investment account.
- Update the stock ledger: You need to update your company’s stock ledger to reflect the new ownership of the stock. This may involve adding new entries for each shareholder or updating the entries for existing shareholders.
- Calculate and pay any taxes: If the stock purchase is subject to taxes, such as capital gains taxes, you need to calculate the amount of tax you owe and make the appropriate payment to the tax authority.
It’s important to keep meticulous records of stock purchases to accurately reflect your company’s financial position and ensure that it complies with tax laws. We recommend consulting with a financial advisor or accountant to ensure proper recording and reporting of stock purchase acquisitions.
What Happens to the Stock Price After Acquisition?
It’s not easy or always possible to predict the impact of an acquisition on your company’s stock price. The stock price may rise after an acquisition while in other cases it may fall.
Several factors can influence the stock price after an acquisition, including:
1. Market Perception
The market’s perception of the acquisition can impact the stock price. If the market views the acquisition as positive and believes it will increase your company’s earnings or market share, the stock price may rise. Conversely, if the market views the acquisition as negative or believes it won’t add value to your company, the stock price may fall.
An example of this is the acquisition of Time Warner by AT&T in 2018. The market initially reacted negatively to the acquisition announcement, as some investors were concerned about the high price tag and the potential regulatory hurdles. As a result, AT&T’s stock price fell in the days following the announcement.
However, over time, AT&T’s management provided more details about their plans for the merger and how they expected to benefit from the acquisition. As a result, the market’s perception improved and AT&T’s stock price gradually rebounded.
2. Financial Performance
Your company’s financial performance after the acquisition is a key factor in determining the stock price. If your company’s earnings improve or its debt decreases after the acquisition, the stock price may rise.
For example, in 2016, pharmaceutical company Pfizer acquired biotech firm Medivation for $14 billion. The market received the acquisition well and Pfizer’s stock price rose following the announcement. This was due, in part, to the expected boost in Pfizer’s financial performance. Medivation had a promising pipeline of cancer drugs, so the acquisition was expected to increase Pfizer’s earnings and improve its financials by adding a stream of revenue.
3. Integration
The success of the integration of your company and the acquired company can also impact the stock price. If the integration is smooth and both companies can achieve synergies, the stock price may rise. If the integration is difficult and the companies can’t achieve the expected benefits, the stock price may fall.
For instance, Comcast acquired Sky, a European telecoms provider, in 2018. The acquisition was expected to boost Comcast’s international presence and help it compete with other media giants like Netflix and Amazon. However, the integration process did not go as smoothly as expected. Comcast encountered challenges in integrating Sky’s systems and processes, and as a result, the company’s earnings fell. These difficulties led to a decrease in Comcast’s stock price and a decline in investor confidence in the company.
4. Competition
The competitive landscape can also influence the stock price. If the acquisition results in increased competition for your company, the stock price may fall.
For example, in 2015, Dow Chemical and DuPont merged to form DowDuPont, a chemical and agricultural conglomerate. The companies expected the merger to make them more competitive with a broader portfolio of products and services. However, after the merger, the market became concerned about increased competition in the chemical and agricultural industries and its potential impact on the company’s earnings. The market’s concerns intensified with the uncertainty of the agricultural market’s future. As a result, DowDuPont’s stock price fell in the months following the merger.
Overall, the impact of an acquisition on the stock price is difficult to predict and can depend on a range of factors. Monitor your company’s financial performance and market reaction after an acquisition.
How Does an Acquisition With Stock Work?
A stock-for-stock merger is where the shares of one company are traded for another. In other words, stock is a currency for the transaction. In this type of acquisition, the target company’s shareholders receive shares of the acquiring company’s stock in exchange for their ownership in the target company.
Here’s how an acquisition with stock typically works from the buyer’s perspective:
- Negotiations: Your company and the target company negotiate the terms of the acquisition, including the exchange ratio (the number of shares of your company’s stock that will be issued for each share of the target company).
- Due diligence: Your company performs due diligence to assess the financial and operational conditions of the target company and determine the value of its stock.
- Approval: The shareholders of both companies need to approve the acquisition of stock, often through a shareholder vote.
- Exchange of stock: If the acquisition is approved, the target company’s shareholders exchange their shares for shares of your company’s stock according to the negotiated exchange ratio.
- Integration: After the acquisition is complete, the target company becomes a subsidiary of your company, integrating both into a single entity.
An acquisition with stock can provide several benefits to your company, including increased market share, access to new markets, and the ability to diversify its product offerings. However, it can also have risks, including dilution of existing shareholders’ ownership and potential integration challenges, such as conflicting company cultures, employees’ resistance to change, or duplication of resources.
Carefully evaluate the benefits and risks of a stock-for-stock merger and consult with a financial advisor before proceeding with the transaction.
What Happens to My Stock in an Acquisition?
In an acquisition, the outcome for existing shareholders of the target company depends on the acquisition terms and deal structure.
If the acquisition is a stock-for-stock exchange, existing shareholders will receive shares of the acquiring company’s stock in exchange for their ownership in the target company at the agreed-upon exchange ratio. If the acquisition is structured as a cash-for-stock transaction, the existing shareholders will receive cash in exchange for company ownership.
In both cases, the outcome for existing shareholders will depend on the value of the acquiring company’s shares or the purchase price compared to the value of the target company’s stock. If the acquiring company’s shares or the purchase price is greater than the value of the target company’s stock, existing shareholders will benefit from the acquisition. If it’s the opposite, shareholders of the target company could be negatively impacted by the acquisition.
Consult with a financial advisor to determine the impact of an acquisition on your stock holdings and make an informed decision about whether to sell or retain your shares.
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