What are Asset Acquisitions?
Asset Acquisitions means a transaction in which a company acquires one or more assets from a target company based on an asset purchase agreement. This agreement, concluded by mutual negotiation, identifies documents needed to transfer the right of ownership of the asset to the acquirer. These documents can include deeds, the purchase price, assignments and any other terms & conditions.
The seller’s board of directors would decide which assets from the Asset Acquisition are material or immaterial. On the other side, if the potential buyer is interested in those assets for their growth, the buyer will purchase them from the target company.
There are two main ways you can undergo an Asset Acquisition.
- One is to buy only assets which are tangible or intangible.
- And the other is to buy a specific business belonging to the seller’s company.
We refer to the former as Asset Acquisitions and the latter as Business Acquisitions or Business Combinations.
Asset Acquisitions
In asset acquisitions, target assets may be diverse. They include tangible assets such as inventory, equipment, real estate, and facilities or intangible assets such as intellectual property rights, trademarks, technology, and know-how.
Its procedure is similar to when a buyer purchases a specific asset from a supplier. Therefore, cash will decrease in the acquiring company’s balance sheet, and acquired assets will increase. And in its income statement, the acquisition price of the asset will be depreciated or amortised over its useful life.
Business Acquisitions or Business Combinations
In a business acquisition, the buyer acquires not only all assets of the business or division, but also their liabilities. When buyers purchase a business, they buy the assets and everything they need to do the business. That includes goodwill, intellectual property, and related employees as well as not only tangible assets such as land, plants and facilities.
In addition, it would be required to take over the operational or financial liabilities incurred in the business. So, it’s pretty similar to acquiring a company.
Therefore, the buyer should treat it the same way as a company acquisition in accounting. Both parties usually renegotiate specific terms, such as employment contracts, suppliers, and rent or lease agreements. Businesses are typically sold at fair market value.
The Structure of Asset Acquisitions
Let’s look at the Asset Acquisition Structure.
Here, we can consider two main methods.
- One is to absorb the assets acquired by the buyer directly into their existing assets; this is ‘direct acquisition’. Many strategic investors could take this method. They can create synergies with their current business through their acquired assets.
- Another way is to use a subsidiary or a special purpose vehicle (SPV). The buyer places the acquired business in a subsidiary or its SPV.
SPVs protect the parent company from potentially severe financial risks that stem from highly leveraged or speculative investments, including acquisitions.
There are several reasons for establishing an SPV.
For example, for acquisition financing through a subsidiary to take over a business. Alternatively, professional investment firms with no business, such as private equity funds, may establish an SPV to pool investor funds together for a single, specific purpose. Or, even if you are a strategic investor, you may use an overseas subsidiary or SPV to bring your outbound business when the deal is a cross-border asset acquisition.
When are Asset Acquisitions beneficial?
The primary advantage of asset acquisition is that the buyer can choose which asset they want to buy, while the seller can choose which asset they wish to sell. This can save the buyer a lot of cash in the long run as they do not have to purchase an entire business solely to use one or more assets they wish to own.
The valuation process of a single asset is also much less complex and more accurate than valuing an entire business. Sometimes Acquisition may not be beneficial to your company. We suggest looking at Joint Ventures for you to understand working with companies more collaboratively.
We also suggest looking for Divestitures for when companies want to dispose of a business unit after acquisition.
Case Study of KKR’s Business Acquisition of Unilever
Here we can see an overview of KKR’s business acquisition of Unilever’s butter spread division, Upfield, worth £6 billion. The deal received the prestigious Private Equity Deal of the Year award.
Unilever first spun off its plant-based butter spread division into a company now known as Upfield, which private equity firm KKR later bought.
The transaction occurred in 2017 and closed in July 2018. Some notable products of Upfield include ‘Flora’ and ‘I can’t believe it’s not butter’.
The acquisition came even after Unilever received a £115 billion takeover bid from Kraft Heinz. KKR wanted to acquire the spread business as they viewed it as a strong investment opportunity.
Then-CEO of Unilever, Paul Polman, claimed: “I am confident that under KKR’s ownership, the spreads business with its iconic brands will be able to fulfil its full potential as well as societal responsibilities”.
Unilever put the spread business up for sale as they wanted to boost shareholder confidence & retention, returning the net cash from the sale to the shareholders.
- First, Unilever plans to sell the spread business.
- Second, KKR wants to buy the business.
- Third, the two parties negotiate the deal amicably.
- Fourth, KKR establishes an SPV.
- Fifth, KKR uses a leverage buyout method by pooling some of its own capital and many loans from external financial institutions into the SPV. Leveraged buyouts are usually financed with 90% debt and 10% equity.
- Finally, the SPV pays Unilever, and then Unilever transfers all the assets related to the spread business to that SPV.
The assets include tangible and intangible assets owned by the business, a workforce of 2,300, and related business liabilities.
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