What are the disadvantages of a stock deal?
There is no such thing as “the perfect deal.” That goes for nearly any deal structure and across any industry. Measuring the pros and cons of M&A needs to be done on a case-by-case basis. Stock deals, while full of advantages, can also present a few key disadvantages as well.
First, stock deals become more hairy the more shareholders are involved. It can be case of corralling the cats. If the buyer is intent on acquiring 100 percent of the company, they’ll need to get the agreement of all the company’s shareholders. Many times there could be hold-outs when it comes to deal structure or deal closure itself. Such a deal can be extremely frustrating, especially when the entire deal might lean on a single shareholder. Problem number one can be typically be overcome through a merger transaction which obviates the need for total agreement among shareholders.
Secondly, stock deals lack the same tax advantages had from choosing an asset transaction in M&A. Such tax disadvantages can often be overcome with a 338 election (the IRC code that allows stock transactions to be treated like asset deals for tax purposes).
Unfortunately stock deals don’t always avoid the problems of obtaining third-party consents that often arise in an asset transaction. The deals’ pertinent documents must be carefully reviewed for change of control provisions.
Stock deals are typically preferable to asset sales when either tax costs are too high or control issues preclude stock from being transferred. In many cases asset sales produce heavy tax burdens. Because many partial stock deals occur when private companies usually happen only when some previous stockholder decides to stay or become active as a manger of the company.
I had to use the old cliche, but success in any transaction is so frequently dependent on both the internal and external pieces of your particular scenario.
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