Challenges faced by share acquisition

Saptaswara Chakraborty | North Eastern Hill University | 19th June 2020

Introduction

Mergers and acquisitions are considered a very complex financial topic. Such a business is often used where alliances are made in order to diversify or to grow their respective business. Several matters are involved while going for acquisition be it a share or a stock acquisition and an asset acquisition. A typical merger and an acquisition will have a lot of intricate issues in tax, legal and synergy. A merger and an acquisition is usually an amalgamation of two companies that are distinct with their form and their legal field. However, when an acquisition or a merger occurs, it gets formed up into a single one. While talking of mergers and acquisitions, it is known that there is a single legal entity that holds the combined assets and liabilities of an original company. 

A stock sale or an acquisition is the acquiring of a company wherein the buyer simply purchases the outstanding stock of a company directly from the stockholders. In such an acquisition, the status of a company remains the same, and the name of the company, operations, contracts, etc. everything remains the same unless and until a change is desired for or contemplated by the agreement. 

The functioning of a stock acquisition

All over the globe, acquisitions remain the quickest route for companies to have accessibility to the new markets and new capabilities. The main factor of such an acquisition is mainly because of the globalization. After the hit of globalization, the technologies started developing and hence started accelerating, more and more companies, therefore, found it to be an effective alternative for their growth. Understanding the functioning of a stock acquisition is important in order to understand what are its disadvantages. When any company is acquired, essentially two alternatives are available, firstly through cash and secondly through stock or shares. A stock purchase acquires a target company’s stock directly from the selling company or the selling shareholders. In such a state, the buyer takes over the liabilities as well as the assets, including the potential liabilities from the past action of the business. In such a transaction, the synergy risk is shared in such a proportion, that the percentage of the combined company that is the risk of both the acquiring and the selling shareholders that they will own.

A good example of this can be given by comparing both the buyer and the seller market capitalization. Suppose buyer A wants to acquire its seller B that is through a share acquisition. The market capitalization of the buyer A stands much higher than that of the seller B, and therefore the buyer A thinks to attain an additional synergy value by merging both the buyer and the seller company. The expected net gain received by acquisition is referred to as Shareholder Value Added (SVA), and this is the difference between the estimated value of such a synergy obtained through an acquisition, the buyer may also see the potential of the company that is going to be acquired. While acquiring such company, the acquirer would keep in mind about the prospects and the potential for the growth in value of the company’s shares the as it may stand or can stand in future or it might see for the current and the future liabilities of the business that are minimal or so can be adequately managed. 

The challenges faced with share acquisitions

Stock purchase or a share acquisition has both the advantages as well the disadvantages, but how the acquiring company or the acquirer takes such a decision is what decides for its future. Following are some of the disadvantages or the challenges faced with a share acquisition:

• As has been previously mentioned, in a share acquisition, the buyer buys not only the assets owned by the target company but also the liabilities, some which may be visible and some which may not. Hence when a share acquisition is performed, at that time, it remains unclear whether the entity bought is good or bad.
• Secondly, when an entity or a company is bought, the acquirer receives neither the “set-up” tax benefit nor the advantage of handpicking the profitable assets and liabilities, thus making the deal rather more ambiguous.
• In a stock acquisition, when the assets are not scrutinized, it becomes impossible for the buyer to acquire the so-called “toxic assets”. It may be so that the value of such has considerably fallen or are on the verge of falling, but the buyer cannot be aware until they own them. Such an asset can be bank deposits, weak currencies, etc.
• If a company ever wants to get rid of the unwanted liabilities, it can be done by creating separate agreements wherein the target takes them back.
• Various security laws are applicable, and therefore they are required to be dealt with the as when especially the target has a lot of shareholders. Sometimes a situation may arise wherein the shareholders may not wish to sell their stocks, and thus it may complicate the process and the cost of acquisition.
• Goodwill is not tax-deductible.

Conclusion

While dealing with the stock acquisitions, the challenges faced are a number of them with each overpowering the other. However, when compared with the advantages of such an acquisition, it can be found that such an acquisition is much less complex and also provides several tax benefits. From this it can be understood that it is up to the company to choose such an acquisition, that would be beneficial for them