It's rarely the case that mergers and acquisitions are as simple as either of the two parties would like. Even when both companies agree to perform the transaction, they still "compete" to make sure that their interests will be preserved once the deal has finished.
Whether you've just started considering selling your business or you're currently in the midst of a merger, we could all use a refresher on the different types of M&A transactions. Below, we'll go over each of the three most common structures for M&A transactions: asset purchases, stock purchases, and mergers.
An "asset purchase" is exactly what it sounds like. The buying company acquires the target company by purchasing exactly the tangible and intangible assets that are described in a document known as the purchase agreement. Companies often use asset purchases when the buyer only wants to acquire a single business unit, division, or subsidiary of the target company.
This type of M&A transaction is often favored by the buyer because it provides a great deal of freedom to "pick and choose" the assets and liabilities. In doing so, the buyer may attempt to avoid certain hidden or unknown liabilities, although laws and regulations may nevertheless require the buyer to assume them. However, there's one big downside of asset purchases: identifying all of the target company's assets and writing documents to transfer them can be a complex and time-consuming process.
Instead of explicitly selling assets, many M&A deals are done by selling shares of the target company's stock. Once the buyer owns a majority of the stock, it can take possession of the target company. All of the target company's assets and liabilities remain untouched, but they're now under new management.
One of the main benefits of the stock purchase route, as compared with an asset purchase, is that it's much simpler and more straightforward from a regulatory perspective. Because the target company's assets and liabilities are only changing hands, there's no need to go through procedures for assignment and third-party consent that can create delays.
However, stock purchases can also create problems of their own. Shareholders who are opposed to the deal and refuse to sell may be able to stall the transaction, or continue to create trouble even after the deal goes through. In order to avoid these problems, the buyer may require that a sufficiently high percentage of shareholders agree to sell their stock before they will approve the transaction.
Unlike the previous two options, in which one company acquires another, a merger involves two companies joining forces to form a single legal entity. The new company assumes all of the assets, liabilities, and rights of the company that ceases to exist. Once the merger is complete, the target company's shareholders may be paid in cash, the buyer's stock, or a combination of the two.
Many mergers are either "triangular" or "reverse triangular," depending on what makes the most business sense. During a triangular merger, the buyer uses a subsidiary company that the target company will merge into. During a reverse triangular merger, the buyer's subsidiary instead merges into the target company.
Because the buyer assumes all of the target company's assets and liabilities, the effects of a merger are not unlike the effects of a stock purchase. However, one major advantage of performing a merger is that only a majority of shareholders have to give their consent, which makes it easier to get approval for the transaction.