Choosing the best structure for a merger or acquisition is critical to the deal’s success for both parties. These transactions are, after all, usually quite complex, and one type of structure may favor one party more than the other. For these reasons, both parties (and their attorneys, of course) must consider the respective legal, tax and business issues and craft a mutually beneficial transaction structure.
There are generally three options for structuring a merger or acquisition deal:
- Stock purchase. The buyer purchases the target company’s stock from its stockholders. The target company remains intact, but with new ownership. The buyer must negotiate representations and warranties concerning the business’s assets and liabilities, to ensure a complete and accurate understanding of the target company.
- Asset sale/purchase. The buyer purchases only assets and assumes liabilities that are specifically indicated in the purchase agreement. (Buyers often favor this structure because they can choose only the assets they wish to acquire and the liabilities they wish to assume. Sellers may not prefer this sale method because it can have adverse tax consequences due to the allocation of the purchase price to the various assets.) This structure is often used when the buyer wishes to acquire a single division or business unit within a company. It can be time-intensive and complex, because of the extra effort involved in identifying and transferring only the specified assets.
- Merger. Two companies combine to form one legal entity, and the target company’s stockholders receive cash, buyer company stock, or a combination. A key advantage of a merger is that it generally requires consent of only a majority of the target company’s stockholders—it could be a good choice when the target company has multiple stockholders.