Why Deal Structure Is Critical In Merger and Acquisition
I want to learn about how valuation is done in merger and acquisition due to which I select this article to understand why deal structure is important in merger and acquisition. This article is written by Mr. Frank C. Evans.
Risk assessment is on the most important part while purchasing the target. Buyers usually prefer asset acquisition as they receive stepped-up tax basis in the assets acquired and reduced their risk by acquiring only identical assets whereas seller prefer stock sales because for this they have to pay tax only once. Therefore, negotiation is one of the most important parts of the merger and acquisition. Some of the reasons for buying and selling of the firm are:
Seller motives could be personal desire to leave, lack of successor, declining performance, presence of strategic disadvantage, market or industry conditions that create strong sale prices.
Buyer motives could be expansion, grow, diversify, enhance profitability and cash flow through revenue enhancement or cost reduction, acquiring new technology and preventing competitors from entering the market.
Two ways for making deal are:
Stock Transaction: Buyer buys all the tangible and intangible assets and liabilities including unknown and contingent liabilities of the target firm. Due to which buyer don’t prefer the stock transaction, as this increases their risk. Sellers prefer stock deal because they have to pay tax only once on difference between the sale price and their cost basis in the stock and this tax is computed at long term capital gain tax rates. Stock transaction provide some benefits to the buyer like corporations contracts, credit agreements, labor agreements and any favourable tax attributes of the seller, such as ordinary or capital loss carry forwards.
Asset transaction: In this type of deal only those tangible and intangible assets and liabilities are...