Asset Acquisition Strategy: Key Concepts Explained

What Is an Asset Acquisition Strategy?

An asset acquisition strategy is when one company buys another company through the process of buying its assets, as opposed to a traditional acquisition strategy, which involves the purchase of stock.

Understanding an Asset Acquisition Strategy

Acquisition strategies in general are a means for a company to promote growth by purchasing other companies or business units of other companies. This is in contrast with an organic growth strategy, whereby the focus is increasing the activity of in-house business lines.

There are many reasons a company would want to buy another company. These reasons can include building economies of scale in an existing product or service line, reducing competition, moving into an adjacent market, penetrating another geographic market, benefiting from synergies, or even pre-empting a competitor that may be eyeing the same company.

An acquisition strategy provides a way for a large company in a mature sector to advance incremental sales or profit growth, or for a smaller firm to accelerate steps toward a size target.

Most acquisitions are done through the purchase of a company's stock and obtaining control of that company. An asset acquisition strategy focuses on purchasing the assets of a company and sometimes its liabilities. Because both companies can decide which assets and liabilities should be exchanged, an asset acquisition strategy allows for more flexibility in structure than a stock purchase.

Asset and Liability Determination

The benefit of an asset acquisition strategy, when compared to a stock acquisition strategy, is that the acquiring company gets to pick and choose the parts of a company it likes and feels would benefit their company. This is in contrast to a stock acquisition strategy where a company would have to buy all parts of a company where certain areas might be a poor fit and have to be divested in the future.

Choosing which assets, and sometimes liabilities, to acquire avoids any unexpected issues that were not disclosed before the acquisition, which could sour the trade or cause more problems than are worth the acquisition. This reduces risk and any potential losses.

This type of strategy works well in relation to bankrupt companies, where a company can choose the remaining profitable parts of a company without having to buy the parts that no longer provide any value.

Pricing and Incorporating an Asset Acquisition Strategy

Another crucial element of an asset acquisition strategy is the purchase price and financing method. Prudent managers will not overpay for an asset (i.e., they will avoid making a dilutive acquisition), and when they do decide to buy another company or a unit of a company they will make sure that the impact to their company's balance sheet is acceptable.

For instance, if too much debt must be incurred to acquire an asset, without enough of a future payoff, a company may decide not to proceed with the acquisition.

Another element of the strategy is determining how the acquired asset will be integrated and then tracked in terms of contribution to profits. It is important that a sound method is in place to monitor the acquired asset's contribution to the existing company's cash flow, earnings per share (EPS), or other financial targets so that management can build a template for future asset acquisitions.

Management will also consider the steps needed to successfully close an asset acquisition strategy and whether there is a long-term cultural fit in regards to personnel.

The purchase price paid for the assets and how it is to be allocated amongst the assets is set forth by the Internal Revenue Service (IRS), which states that the purchase price should be allocated using the residual method. This states that the purchase price is allocated to the assets based on their fair market value and any additional amount be allocated to goodwill.