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This article is written by Kopal Aggarwal, pursuing a Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from


In September 2013, Microsoft announced that it had acquired Nokia’s devices, services, patents and licenses for a total of €5.44 billion in cash. With so much of Nokia being tied up in its phones and patents, one might wonder why Microsoft didn’t buy the whole company.

To understand the basics, we should first start what exactly is an acquisition. An acquisition is a corporate transaction wherein an acquirer purchases the stock or assets of another company. Acquisitions are made in order to build on the Target Company’s strengths and secure its synergies. This can be done in two ways- either by purchasing the majority of the stock of the target company i.e. procuring more than 50% of the shares which is called a share acquisition or by purchasing the assets of the company which is called an asset acquisition. When buying a business, the decision whether to structure the transaction as an asset purchase or a purchase of shares is an extremely important consideration.

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In this article we will be studying the aspects of both types acquisitions and their advantages and disadvantages

Asset Acquisition 

As mentioned above, an asset purchase or acquisition refers to the buying of the target company’s assets including some of its liabilities by the purchaser company. The Buyer can also choose to ignore the liabilities of the Seller altogether thereby incurring less exposure to any sort of risks. The company who is acquiring the asset maybe called a ‘Buyer’ or an ‘acquirer’ and the company whose assets are being purchased is called the ‘Seller’ or ‘Target’.

In an asset acquisition, the Buyer acquires the key assets of the Seller company that are currently in operation such as equipment, goodwill, licenses, inventory etc. The seller remains the owner of the entity and the Buyer can just choose the assets they want to purchase that would be beneficial to their company.

One subset of an asset purchase is a slump sale where in the entire business of an entity is sold as a going concern without value being assigned to each asset individually. As per section 2(42C) of Income -tax Act 1961, ‘slump sale’ means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. This method is typically chosen when the assets cannot be bifurcated and the Acquirer wants to save in taxes and stamp duty.

Stock Acquisition

This is also called equity purchase involving the purchase of the Target entity itself like taking on both the assets and liabilities of the company and any pending or ongoing legal cases against it. It’s a less complex concept as there is no retitling of various assets and consent doesn’t have to be acquired from existing clients to continue contracts, as they’re included within the acquisition.

In this type of M&A, the ownership passes to the Buyer along with every asset and liability of the Target company even if certain assets or liabilities are undesirable for the Buyer. The only way to get rid of the unasked asset or liability is to execute a separate Agreement through which the Target can take them back. Generally, this is a more frequently used method however, one of the downside factor in share purchase is the deprivation from tax deduction, as in an asset purchase, the Acquirer can claim tax benefit arising out of depreciation of assets as a deduction while in share purchase he cannot do so.

Pros of an Asset Purchase 

  • One of the main advantages of an asset acquisition is tax structuring as the buyer can “step up” the amount of the assets over their current price value and obtain deductions for depreciation.
  • The buyer does not have to assume any liabilities of the Target Company. They simply have to just choose the most attractive assets thereby leaving the unwanted assets of the Target.
  • In an asset purchase since there is a less risk of incurring unwanted liabilities, there is a less requirement of due diligence as compared to a stock purchase.
  • The Seller does not have to exchange ownership with the buyer and he retains full ownership of the Target Company.
  • Goodwill can be amortized for up to five years which can be beneficial for tax purposes. 

Cons of an asset purchase 

  • Certain assets may need to be retitled in the name of the buyer.
  • Vendor and supplier contracts need to be renegotiated or reassigned by the Buyer 
  • If the asset includes employees, then their contracts may also need to be renewed or renegotiated.
  • The Seller may insist on a higher purchase price as the tax costs for the seller is high.
  • The value of the asset may depreciate over time and be worth less than originally paid by the Buyer. 
  • There might be certain contracts that may be non-assignable.

Pros of a stock purchase 

  • The process of a stock purchase is much simpler than an asset purchase since the buyer just have to buy the entire company including all its assets and liabilities thus leaving the costly process of retitling and re-evaluating every asset of the Target.
  • Employee contracts need not be renegotiated.
  • The ownership is in the hands of the Buyer. 
  • Buyer can avoid paying payment of transfer taxes.
  • More frequently used method in mergers and acquisition.
  • Buyer can obtain the Company’s non-assignable contracts or licenses without getting the prior permission of the other party.

Cons of a Stock Purchase 

  • Since in a stock purchase, the buyer purchases the whole entity this may also include absorbing unwanted assets and liabilities. 
  • The buyer cannot claim any tax benefits under stock purchase.
  • Minority shareholders can create a problem if they refuse to sell their shares. 
  • Goodwill has to be purchased by the buyer as part of the transaction which is not tax deductible. 

Which one is better for the Buyer: Asset Purchase or Share purchase?

It all depends on the buyer. If he thinks he can deal with all the assets and liabilities of the Target company without any hassle, then he should definitely go for a share purchase as this would give him control over the Target Company. But if he just wants nit-pick only the best aspects of the entity then he should opt for an asset purchase as he can carve out the liabilities he would want and discard those which he does not need. Having said this, both the methods have their advantages and disadvantages, specifically those related to taxes and contracts. From the tax point of view, an asset purchase does seem appealing as one can avail deduction on the depreciation of the assets while in share purchase the buyer gets no such benefit. However, he has to pay the amount of the assets along with GST charged on it whereas in a share purchase GST is not applicable. In general, an asset purchase is more beneficial for a Buyer since involves less “unknown” factor and risks.


There are various factors to consider how to expand and diversify your business through acquisitions. Whichever method an Acquirer chooses should yield maximum results for the Company. While structuring the deal, the acquiring company must look at various aspects, such as tax exposure, hidden liabilities, existing contracts, and intellectual property rights, and thereafter make the correct choice. The route to be adopted for acquisition should be based on the company’s vision and objective for the acquisition. 

In the case of Microsoft, it could be said that they acquired the assets of Nokia because they didn’t want the extensive pension liabilities that typically comes with high-quality Finnish employees. However, the deal did strengthen the base for Microsoft to deliver their software through Nokia devices whose biggest asset is its capability to deliver low cost products to all the corners of the earth on a profitable basis.

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