“How do mergers work” asks your Uber driver as you search for your credit card. “I know a little, but what I don’t get is what is the difference between an equity and asset deal in M&A?” Sliding your card into the backseat POS terminal, you tell him this …
What is the Difference between an Equity and Asset Deal in M&A?
The difference between an equity and asset deal in M&A is what is being purchased, the transaction complexity, and differing buyer and seller implications. A merger and acquisition (M&A) transaction has two primary types of structures: an equity (stock) or an asset structure. Here are the details to what is the difference between an equity and asset deal in M&A?
Equity (Stock) Transaction
The Purchased – The buyer purchases shares from the target firm’s shareholders in an M&A equity transaction. Upon the deal’s closing, the buyer owns 100% of the company’s assets, debt, and additional contractual agreements.
Transaction Complexity – Since the buyer purchases the company in its entirety, the transaction tends to be simpler. However, low complexity does not mean extensive due diligence is not warranted. The new buyer is contractually responsible for the firm’s known and unknown liabilities, so deep analysis and risk assessment are paramount.
Buyer Implications – The new buyer inherits and benefits from the existing corporate structure and assumes all assets and liabilities of the new acquisition. Company contractual obligations and all employees are the new owner’s responsibility, as well.
Seller Implication – Once the sale is finalized, the seller is no longer involved with the company providing no management transition or carve-out agreements exists, or individual asset conveyance is not required.
What is the difference between an equity and asset deal in M&A? The consideration exchanged, strategic implications, and tax treatment are differences between an M&A equity and asset transaction.
Asset Transaction
The Purchase – In an M&A asset-based transaction, the buyer purchases the target firm’s PPE, plant, property, and equipment. PPE includes real estate, equipment, inventory, client contracts, and intellectual properties. The buyer also acquires the company’s asset-related liabilities, and employees remain with the selling firm.
Transaction Complexity – Asset transactions are more complicated than equity deals because fixed assets are being acquired. Individual assets and liabilities must be identified, valued, and contractually transferred to the new owner. Valuations and legal agreements tend to be complex and detailed as the potential for unfavorable tax treatment is at stake, if not structured properly.
Buyer Implications – The buyer can cherry-pick the assets and liabilities of interest. The advantage is the buyer can select income-producing assets and avoid unwanted liabilities.
Seller Implications – The seller retains all unsold assets and liabilities, and the company remains an ongoing concern unless otherwise liquidated. The seller's advantage is the sale’s cash injection and the remaining company’s debt reduction.
What is the difference between an equity and asset deal in M&A? An equity transaction involves buying all the outstanding shares of a target company, thus owning 100% of the firm and retaining its employees. An asset transaction is the purchasing of specific assets and the assumption of the related liabilities and does not result in ownership of the selling company. Strategic growth initiatives, liability considerations, and tax treatment are deciding determinants when choosing between these acquisition avenues.
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