Why Asset Deals Dominate Smaller M&A Transactions

M&A headlines often involve mergers and transactions where the acquiror buys the seller's stock.  So, why is it that different deal structures, and asset deals in particular, are so prevalent down market?

First, let's set the table with some baseline considerations for big transactions:

▶ For public companies, pure stock deals are difficult, as 100% control involves acquiring every single share from every single holder.

▶ Mergers, on the other hand, only require majority stockholder approval in most cases. (While tender offers are beyond today's scope, suffice it to say that many tenders are intended to garner the shareholder votes necessary to make a merger happen.)

▶ Asset deals are also unrealistic for a number of reasons, including the impracticality of retitling a massive number assets (imagine an acquiror having to retitle each van for a national flower delivery service, for example), the need to avoid contract assignments and related counterparty consent rights, and workforce considerations (recall that in an asset deal, each employee is terminated by the seller and rehired by the purchaser, which can give rise to WARN Act obligations, PTO cashout liabilities, and other issues).

▶ So, let's talk about smaller transactions, which can still be pretty big ($100M+):

▶ With shares held by a small group of holders, stock deals are a possibility.

▶ Similarly, mergers and asset-deal structures can also be used to get a deal done despite non-supportive shareholders, as they often only require majority approval (subject, of course, to shareholder agreements and other governing documents).

▶ Stock deals are most likely where business-critical contracts and licenses are maintained despite a change of ownership but would need to be assigned in an asset deal or would require a new, rigorous government approval process.

▶ Even if the deal needs to be characterized as a stock deal for legal purposes, the parties may elect for it to be taxed as an asset deal so that the buyer gets a set up in basis (for example, via a Section 338(h)(10) election).

▶ Generally, buyers would prefer for the deal to be an asset deal legally, too, so that they don't inherit the entity's trailing liabilities. This is a bit less of a concern with large public companies that are subject to SEC reporting requirements involving extensive disclosures and that are also constantly probed for weaknesses by short sellers.

▶ Finally, the number of assets and the size of the workforce tends to be smaller, such that asset deals are feasible.

▶ Note that there are tax implications for all of these structures, with sellers tending to prefer stock deals for capital gains treatment and to avoid C-Corp double taxation, and buyers tending to prefer asset deals for re-depreciation.

The bottom line is that while there are exceptions based on contract and license continuity, most smaller deals are done as asset transactions.