Acquisition essentially means to acquire or to takeover. And when we talk about acquisition, it is always clubbed with mergers.

In short mergers and acquisitions are referred to as M&A. The process of acquisition is a case of dominance of one company over the other. Here a bigger company will take over the shares and assets of the smaller company and either run it under the bigger companys name or might run it under a combined name.

Asset Acquisitions
In an asset sale, individually identified assets and liabilities of the seller are sold to the acquirer. The acquirer can choose ("cherry pick") which specific assets and liabilities it wants to purchase, avoiding unwanted assets and liabilities for which it does not want to assume responsibility. The asset purchase agreement between the buyer and seller will list or describe and assign values to each asset (or liability) to be acquired, including every asset from office supplies to goodwill. Determining the fair value of each asset (or liability) acquired can be mechanically complex and expensive; tedious valuations are costly and title transfer taxes must be paid on each asset transferred. Also, some assets, such as government contracts, may be difficult to transfer without the consent of business partners or regulators. If the assets to be acquired are not held in a separate legal entity, they must be purchased in an asset sale, rather than a stock sale, unless they can be organized into a separate legal entity prior to sale. Subsidiaries of consolidated companies are often organized as separate legal entities, whereas operating divisions are usually not. A major tax advantage to the acquirer of structuring a transaction as a taxable asset purchase is that the acquirer receives stepped-up tax basis in the target's net assets (assets minus liabilities). This means that the acquired net assets are written up (or down) from their carrying values on the seller's tax balance sheet to fair value (FV) on the acquirer's tax balance sheet. The higher resulting tax basis in the acquired net assets will minimize taxes on any gain on the future sale of those assets. Under U.S. tax law, goodwill and other intangibles acquired in a taxable asset purchase are required by the IRS to be amortized over 15 years, and this amortization is tax-deductible. Recall that goodwill is never amortized for accounting purposes but instead tested for impairment. In a taxable asset sale, the seller pays tax on any gain on the sale of its assets. Of course, the seller won't agree to bear the tax burden of an asset sale while the acquirer enjoys the benefit of a tax step-up without some incentives. To induce the seller to agree to an asset purchase, the buyer will often pay a higher purchase price (relative to a stock acquisition) to the seller as compensation for the seller's tax liability.

Stock Acquisitions
In a stock purchase, all of the assets and liabilities of the seller are sold upon transfer of the seller's stock to the acquirer. As such, no tedious valuation of the seller's individual assets and liabilities is required and the transaction is mechanically simple. The acquirer does not receive a stepped-up tax basis in the acquired net assets but, rather, a carryover basis. Any goodwill created in a stock acquisition is not tax-deductible.

However, if an Internal Revenue Code (IRC) Section 338 election is made by the acquirer (or jointly by the acquirer and seller), the stock sale is treated as an asset sale for tax purposes. A Section 338 election entitles the buyer to the coveted stepped-up tax basis and tax-deductible goodwill, but also triggers a taxable gain on the hypothetical asset sale. We will discuss Section 338 elections more in another lesson. Although the buyer acquires all assets and liabilities in a stock purchase, it may contractually allocate unwanted liabilities to the seller by selling them back to the seller. In the stock acquisition of a corporate subsidiary without a Section 338 election, the selling parent company may use the tax attributes (e.g. NOLs) of its other subsidiaries to offset its gain on the sale of target stock. However, the parent cannot use the tax attributes of the targetsubsidiary because they are lost to the buyer in the transaction and subject to limitation under Section 382.