Acquisition of a Company
Acquisition of a Company
‘Acquisition’ is a corporate term to define buying all of another company and gain the ownership of the company. Here, companies share a common target and work towards achieving the same. Once the main company achieves 50% of the target company, the company takes over the ownership of the company. This is called acquisition. Few aspects about acquiring a company are as follows:
- The acquiring company purchases the target company’s stock and other assets to claim ownership of the company completely.
- The acquiring company becomes the decision maker and policy setter.
- The company doesn’t require approvals from the old company/shareholders after takeover.
- Acquisitions can be paid for either in cash or in the acquiring company’s stock, or a combination of both.
Reasons for Acquisition
A company can acquire another company at multiple levels. This is subjective to the collaborative agreement and necessities. Before acquiring a company it is vital to note that the company to be acquired should have its own labour and management, a brand name, and other intangible assets. There are multiple reasons behind acquiring a company. They are:
- Achieve economies of scale
- Greater market share
- Increased synergy
- Cost reductions
- New niche offerings
- Expansion of operations to another country
Types of Acquisitions
An acquisition can be of two types as a company acquires the other company at different levels. These types are:
- Asset Acquisition
- Stock Acquisition
The level at which a company is being acquired by the other company decides the level of control the company has got on the other. Taking over a company is usually a result of a collaborative business venture or to expand the business into different segment, worldwide.
By definition, the acquirer buys some or all of the target’s assets/liabilities directly from the seller. If all assets are acquired, the target is liquidated. The company that purchases the assets is called- ‘Acquirer’ and the company that gets acquired is called ‘Seller’. The acquirer chooses the assets or liabilities to be purchased from the seller. Focusing more on the office supply to goodwill, the acquirer chooses wisely and avoids every unwanted asset. The whole process is costly and tedious starting from transfer of name and payment of taxes. Few aspects of asset acquisition are as follows:
- Some assets, such as government contracts, may be difficult to transfer without the consent of business partners or regulators.
- If the assets to be acquired are not held in a separate legal entity, they must be purchased in an asset sale, rather than a stock sale.
- If the target liquidates, then there are two levels of tax, at the corporate level and again at the shareholder level when the liquidation proceeds are distributed.
- The major tax advantage is that acquirer receives fair value valuation in the target’s net assets (assets minus liabilities).
- Payment of transfer of asset could lead to GST or stamp duty implication.
A Stock purchase is where all of the assets and liabilities of the seller are sold upon transfer of the seller’s stock to the acquirer. This is a much simpler and less tedious process where the acquirer does not receive stepped-up tax basis in the acquired net assets. But, there is an ensured ‘Carryover’ (Buyer assumes the seller’s existing tax basis in the acquired net assets) basis. Any goodwill created in a stock acquisition is not tax-deductible. Few factors of stock acquisition are:
- A single level of tax–at the shareholder level.
- The buyer’s basis in the acquired stock is stepped up to the purchase price (FV). The buyer assumes a carryover basis in the acquired assets.
- The unwanted assets are sold back to the seller.