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Asset Acquisitions

By Jamie Johnson What is an asset acquisition?

An asset acquisition, also known as an asset purchase, is when a firm directly buys certain assets of another firm. This contrasts with a stock purchase, where one company acquires another firm.

What are the key documents of an asset acquisition?

The main document of an asset acquisition is the asset purchase agreement (APA). This sets out the assets that are being moved and at what price.

There will often also be a disclosure letter. This will synthesise the information given to the buyer and show any exceptions to any warranties that were provided.

What are the main steps in an asset acquisition?

There are three main steps to an asset acquisition: the preliminary agreements, the due diligence process and the approvals.

The preliminary agreements

There are three primary documents that the buyer and seller might sign before they start to negotiate the sale: the confidentiality agreement, the exclusivity agreement and the heads of terms.

The confidentiality agreement is necessary because the buyer will find out a considerable amount of valuable information about the seller. Thus, the two will sign a non-disclosure agreement (NDA). This will set out restrictions on the buyer’s disclosure of information about the seller.

In some cases, there may be an exclusivity agreement. This is where the seller agrees that it will not look for other potential buyers in a given time window. The buyer may push for this agreement to allow them to negotiate with the seller exclusively.

The heads of terms will usually be reached at the start of the process. This is where the basic principles of the transaction are agreed between the buyer and the seller. These heads of terms can be binding, non-binding or partially binding.

The due diligence process

The due diligence involves the buyer finding out about the seller. This will allow the buyer to see if the asset is worth buying. The due diligence might centre around issues such as property rights, intellectual property rights, the customers that they could gain and any associated employees associated.

Approvals

There are five primary sources of approval that the transaction will have to have: board approval, shareholder approval, regulatory approvals, landlord’s approval and lenders’ approval.

Usually, the board of directors will have to approve the transaction as a whole and the APA. Official minutes will have to be taken of this approval to record the provision of consent for the transaction.

Shareholders might have to approve the transaction due to the company’s articles of approval. In some cases, it also might be required if it involves a substantial property transaction because of the Companies Act 2006.

Regulatory approvals might be involved if there are competition issues or issues relating to a particular sector. For example, the FCA may have to approve the transaction if there are any financial regulatory issues.

In the cases where the acquisition involves a property with a leasehold agreement, the consent of the landlord is required.

Lenders may have to approve of the transaction if any debt is tied to the assets or if the purchase would mean that any borrowing requirements of either party are no longer met.

Why would someone want to buy assets?

There are three reasons why someone may want to make an asset purchase: the buyer can choose their liabilities, they can select the assets that they wish to purchase and they will potentially pay a lower price.

The buyer can choose the liabilities that correspond to them as a result of the transaction. In a share purchase, they end up assuming the liabilities of the previous business. This means that the buyer avoids any unwanted liabilities.

The buyer can also select the most lucrative assets in the transaction. In a share purchase, they would end up buying the most lucrative and least lucrative assets. This might be disadvantageous to the business.

The buyer can also potentially pay a lower price because the price of some of the assets of a business is likely to be lower than the price of the entirety of that business.

Why would someone want to sell assets?

There are three reasons why someone may want to sell their assets: they have better negotiating power, there is a quicker sale and they can streamline their business.

Sellers may have better negotiating power because buyers often prefer to buy assets. Thus, they can take on a higher profit. They are also able to leverage the fact that they will take on many of the post-sale liabilities to get a higher profit.

Sellers are also able to sell an asset quicker than a business because the due diligence process is much quicker. This can be important for firms hoping to raise capital faster.

The sellers are also able to streamline their business by selling off assets that do not work with the overall strategy of the company. So, for example, if they are trying to focus more on data processing, they can sell off assets that have nothing to do with data processing.

Case studies

Disney buys assets from Fox – (March 2019) Disney spent $71.3 billion to buy the film and TV assets that 21st Century Fox had. This allowed Disney to have a greater amount of intellectual property to use on its platforms. Meanwhile, Fox Corp was able to focus on its news and sports business as a result of the transaction.

Apple acquires assets from Dialog – (October 2018) Apple spent $600 million to get assets and IP from Dialog. This allowed Apple to improve its ability to manufacture chips in Europe. As part of the transaction, 16% of Dialog’s workforce joined Apple. Some of the buildings Dialog previously had were bought by Apple in the deal.

Ineos buys Forties Pipeline from BP – (October 2017) Ineos spent $250 million on a Forties Pipeline System in the North Sea. This system is 235 miles long and allows Ineos to move oil to its processing plant in Grangemouth. This acquisition allowed Ineos to strengthen its position as a critical processor in the North Sea.

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