what are the pros/cons on a stock vs. cash acquisition?

While tax issues can get tricky, the big-picture difference between cash and stock deals is that when a seller receives cash, this is immediately taxable (i.e. the seller must pay at least one level of tax on the gain). Meanwhile, if a portion of the deal is with acquirer stock, the seller can often defer paying tax.

Full Answer

What are the advantages of a cash acquisition?

Another advantage of using a cash acquisition is it prevents dilution of ownership of your company. If you exchange your company's stock to fund the acquisition of another company, its shareholders will be partial owners of your acquired company.

What is the difference between asset acquisition and stock purchase?

In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities.

What are the advantages and disadvantages of asset purchases?

The following table discusses the advantages and disadvantages of asset purchases as compared to stock purchases. In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind.

What are the advantages of buying a company with stock?

If you purchase another company with your stock and your share price increases significantly, you will have paid much more in the acquisition than if you had paid in cash. Using a cash acquisition gives the advantage of a guaranteed purchase price over the fluctuating price of stock.

What are the benefits and disadvantages of an all cash acquisition?

The advantages of using a cash acquisition are the purchase price will be certain and you will not have to dilute ownership of your company. The disadvantages are you will spend down your cash reserves and have a greater risk of debt problems if the acquisition is financed through loans.

Is it better to have cash or stocks?

Investors who need funds for emergencies or are saving for high-ticket purchases will want to invest more in cash. Investors with greater risk tolerance and longer-term horizons for investing can put more money toward stocks.

Why does it matter whether an acquisition is made with cash or with common stock?

The main distinction between cash and stock transactions is this: In cash transactions, acquiring shareholders take on the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. In stock transactions, that risk is shared with selling shareholders.

What are some of the key benefits and considerations of acquiring a company with stock vs cash?

For buyers without a lot of cash on hand, paying with acquirer stock avoids the need to borrow in order to fund the deal. For the seller, a stock deal makes it possible to share in the future growth of the business and enables the seller to potentially defer the payment of tax on gain associated with the sale.

Why is stock better than cash?

Overall, business profits go up over time, which makes stocks more valuable. At the same time, companies distribute cash in the form of dividends and stock buybacks. The former provides an income to investors, which can be reinvested.

Are stocks safer than cash?

If you own a diversified portfolio of well-chosen stocks, you can be confident that you are likely to attain not only a far higher return than you would get from cash – but also a far safer one.

What happens to shares in all-cash acquisition?

An all-cash, all-stock offer is a proposal by one company to buy another company's outstanding shares from its shareholders for cash. The acquirer may sweeten the deal to entice the target company's shareholders by offering a premium over its current stock price.

What happens to stocks after acquisition?

When one company acquires another, the stock price of the acquiring company tends to dip temporarily, while the stock price of the target company tends to spike. The acquiring company's share price drops because it often pays a premium for the target company, or incurs debt to finance the acquisition.

What happens if you own stock in a company that gets bought out?

If the buyout is an all-cash deal, shares of your stock will disappear from your portfolio at some point following the deal's official closing date and be replaced by the cash value of the shares specified in the buyout. If it is an all-stock deal, the shares will be replaced by shares of the company doing the buying.

Are cash acquisitions taxable?

If you've got stock options available that you haven't exercised yet, the sale of those in an all-cash acquisition will be counted and taxed as ordinary income. This could bump you into a new tax bracket, so that's something to keep in mind when putting aside money for your tax bill.

Should I sell before a merger?

If an investor is lucky enough to own a stock that ends up being acquired for a significant premium, the best course of action may be to sell it. There may be merits to continuing to own the stock after the merger goes through, such as if the competitive position of the combined companies has improved substantially.

Is goodwill tax deductible in a stock purchase?

First, in the case of a stock sale, buyers often pay a premium over the value of the hard assets, which takes the form of goodwill. In a stock sale, the buyer can't obtain a tax benefit from this goodwill.

Why do you pay with acquirer stock?

For buyers without a lot of cash on hand, paying with acquirer stock avoids the need to borrow in order to fund the deal. For the seller, a stock deal makes it possible to share in the future growth of the business and enables the seller to potentially defer the payment of tax on gain associated with the sale.

What is a stock deal?

In stock deals, sellers transition from full owners who exercise complete control over their business to minority owners of the combined entity. Decisions affecting the value of the business are now often in the hands of the acquirer.

Do acquirers have to borrow money?

Acquirers who pay with cash must either use their own cash balances or borrow money. Cash-rich companies like Microsoft, Google and Apple don’t have to borrow to affect large deals, but most companies do require external financing. In this case, acquirers must consider the impact on their cost of capital, capital structure, credit ratios and credit ratings.

Can a seller defer paying taxes on a deal?

Meanwhile, if a portion of the deal is with acquirer stock, the seller can often defer paying tax. This is probably the largest tax issue to consider and as we’ll see shortly, these implications play prominently in the deal negotiations. Of course, the decision to pay with cash vs. stock also carries other sometimes significant legal, tax, ...

What are the drawbacks of all cash deals?

As Fox Business notes, “One major drawback of an all-cash deal is that shareholders will be on the hook to pay potential capital gains taxes — which are likely to climb from their current levels.”. For all-stock transactions, these taxes for shareholders would likely be deferred.

What are the benefits of stock based transactions?

But there are numerous benefits to stock-based transactions, where a company uses their stock as currency to purchase another company. Perhaps the biggest perk of all is that the acquiring firm is able to keep its cash reserves around for other functions.

What is the downside of holding cash?

One of the downsides of holding cash is that the buying power of your money slowly deteriorates due to inflation. Right now, the rates being paid on savings accounts and Treasuries are not keeping pace with inflation. The 10-year Treasury rate as of Oct. 8, 2020, was 0.78%.

Why is volatility important in investing?

Volatility is a key factor when investing in stocks. In other words, how quickly or severely do prices whip around. High volatility can cause investors to panic sell. Stock volatility can be more than many investors want to handle on a daily basis.

Can corporate profits be transferred to stock?

Corporate profits can transfer directly into stock prices . While companies have been generating strong profits for the last several years, the pandemic is expected to strain corporate profits for the foreseeable future.

Do stocks have a run?

Stocks have had a great run over the last decade, while the rates offered by savings accounts continued to fall. Investors are being drawn toward more risky investments in search of yield and returns. However, investors must consider volatility and current interest rates when deciding on how much to invest in cash versus stocks.

Why is cash acquisition less risky than stock acquisition?

It is a less risky transaction for both companies than a stock acquisition, because cash does not fluctuate in value like stocks do. If you purchase another company with your stock and your share price increases significantly, you will have paid much more in the acquisition than if you had paid in cash. Using a cash acquisition gives the advantage ...

What are the disadvantages of cash acquisition?

Loss of Liquid Asset. A disadvantage of using a cash acquisition is that you will spend down your cash reserves, your company's most liquid asset. While the fixed assets of an acquired company are expected to give you long-term growth, they will be difficult to convert to cash in the short run.

How does cash acquisition affect debt?

A cash acquisition can also result in debt problems if you finance the purchase with bank loans. Increasing the amount of debt your company holds will increase your company's annual interest payments, potentially creating cash flow problems. While you can stop dividend payments to your shareholders if your company needs the cash, you must make your interest payments every year to avoid default. Taking on more debt to acquire a company may make your company seem riskier to lenders, and your debt rating may be decreased by rating agencies.

What is it called when you buy another company?

When you purchase another company, it is known as an acquisition . You can finance an acquisition through cash or through your company's stock. The advantages of using a cash acquisition are the purchase price will be certain and you will not have to dilute ownership of your company.

Can you stop dividend payments?

While you can stop dividend payments to your shareholders if your company needs the cash, you must make your interest payments every year to avoid default. Taking on more debt to acquire a company may make your company seem riskier to lenders, and your debt rating may be decreased by rating agencies. References.

Does cash acquisition reduce ownership?

No Dilution of Ownership. Another advantage of using a cash acquisition is it prevents dilution of ownership of your company. If you exchange your company's stock to fund the acquisition of another company, its shareholders will be partial owners of your acquired company. They will be entitled to a percentage of your company's future profits ...

What is the difference between asset acquisition and asset acquisition?

When buying or selling a business, the owners and investors have a choice: the transaction can be a purchase and sale of assets. Asset Acquisition An asset acquisition is the purchase of a company by buying its assets instead of its stock. It also involves an assumption of certain liabilities. or a purchase and sale of common stock.

What are the advantages of buying assets?

Here are several advantages of an asset purchase transaction: A major tax advantage is that the buyer can “step up” the basis of many assets over their current tax values and obtain tax deductions for depreciation and/or amortization. With an asset transaction, goodwill, which is the amount paid for a company over and above the value ...

What is an asset purchase?

Asset Purchase. In doing an asset sale, the seller remains as the legal owner of the entity, while the buyer purchases individual assets of the company, such as equipment, licenses, goodwill.

What is the buyer of a stock?

With a stock sale, the buyer is assuming ownership of both assets and liabilities – including potential liabilities from past actions of the business. The buyer is merely stepping into the shoes of the previous owner. The buyer of the assets or stock (the “Acquirer”) and the seller of the business ...

What can the buyer dictate?

The buyer can dictate what, if any, liabilities it is going to assume in the transaction. This limits the buyer’s exposure to liabilities that are large, unknown, or not stated by the seller. The buyer can also dictate which assets it is not going to purchase.

How long does goodwill amortize?

With an asset transaction, goodwill, which is the amount paid for a company over and above the value of its tangible assets, can be amortized on a straight-line basis over 15 years for tax purposes. In a stock deal, with the acquirer buying shares of the target, goodwill cannot be deducted until the stock is later sold by the buyer.

Is an acquisition an asset transaction?

Acquisitions can be structured either as an asset transaction or as a stock transaction. Where an asset transaction. Asset Deal An asset deal occurs when a buyer is interested in purchasing the operating assets of a business instead of stock shares. It is a type of M&A transaction. In terms of legalese, an asset deal is any transfer ...

What is asset acquisition?

In an asset acquisition, the buyer is able to specify the liabilities it is willing to assume, while leaving other liabilities behind. In a stock purchase, on the other hand, the buyer purchases stock in a company that may have unknown or uncertain liabilities. It is necessary for the selling company's assets to be re-titled in the name ...

What is asset purchase?

An asset purchase involves the purchase of the selling company's assets -- including facilities, vehicles, equipment, and stock or inventory. A stock purchase involves the purchase of the selling company's stock only.

How long does goodwill amortize?

Goodwill can be amortized by the buyer for tax purposes over a period of fifteen years. In states that impose sales or transfer taxes on the sale of assets, a stock transaction can avoid some or all of these taxes that apply in the event of an asset transaction.

Do you have to retitle a company's assets in the name of the buyer?

It is necessary for the selling company's assets to be re-titled in the name of the buyer. This is not required in a stock transaction. If the purchase price exceeds the aggregate tax basis of the assets being acquired, the buyer receives a stepped-up basis in the assets equal to the purchase price.

What is asset purchase?

In an asset purchase, a buyer is buying “stuff” – assets. But an important point here is that the buyer need not buy all the stuff. For example, if the company has outdated inventory or raw materials; if one or more pieces of equipment are obsolete; if the company owns the real estate that the business occupies but the buyer plans to move the business, the buyer can, during negotiations try to determine what “stuff” is included in the sale and what stuff is not.

What does buying all the assets include?

Buying all the assets includes all the outdated inventory, broken-down fork lifts, all the old unusable office furniture that has been gathering dust in the storage building, the 27 IBM computers running DOS and the riding lawn mower that was last started when IBM was still making computers. The transaction includes everything the company owns – and the buyer will have to figure our what to do to get rid of the useless stuff.

How long does goodwill amortize?

Goodwill can be amortized by the buyer over 15 years in an asset purchase but such a purchase may not qualify as a tax-free reorganization.

Things to Remember About Stocks

Key Considerations

Cash vs. Stocks

• Investors deciding on whether to invest in stocks or hold cash will need to keep a close eye on interest rates. One of the downsides of holding cash is that the buying power of your money slowly deteriorates due to inflation. Right now, the rates being paid on savings accounts and Treasuries are not keeping pace with inflation. The 10-year Treasury...

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