Acquisition

Structural Forms of an Acquisition

Acquisitions can be structured in several legally distinct ways, each with different implications for which assets and liabilities transfer, how tax treatment is determined, what regulatory approvals are required, and how quickly the transaction can close.

A stock acquisition involves the acquirer purchasing the outstanding shares of the target company directly from its shareholders, either through a negotiated merger agreement or through a public tender offer. The target company survives as a wholly owned subsidiary of the acquirer, and all of its assets and liabilities — including those not specifically identified in the purchase agreement — transfer to the acquirer's consolidated group automatically by virtue of the share purchase. This creates exposure to contingent liabilities that the acquirer may not have fully identified during due diligence.

An asset acquisition involves the acquirer purchasing specific identified assets and assuming specific identified liabilities of the target, leaving the remainder of the target's balance sheet with the selling entity. This structure gives the acquirer greater control over what it is buying and eliminates exposure to unknown contingent liabilities, but it is administratively more complex because each asset must be individually transferred and consented to by counterparties to contracts being assigned.

A merger involves the legal combination of two entities into a single surviving entity, either through a forward merger in which the target is absorbed into the acquirer, a reverse merger in which the acquirer is absorbed into the target, or a triangular merger in which a subsidiary of the acquirer merges with the target, leaving the target as a wholly owned subsidiary of the acquirer parent. Triangular merger structures are among the most commonly used in large public company transactions because they isolate the acquirer parent from direct legal exposure to the target's liabilities while still achieving full ownership.

Strategic Versus Financial Acquisitions

The motivation behind an acquisition fundamentally shapes its structure, financing, valuation, and post-closing integration approach.

A strategic acquisition is made by a company operating in the same or adjacent industry as the target, seeking operational synergies — cost reductions through elimination of duplicative functions, revenue enhancements through cross-selling or market expansion, or technology and intellectual property access that would take years to replicate organically. Strategic acquirers typically pay premium prices because they are acquiring not just the standalone value of the target but the incremental value the combined entity will generate that neither company could produce independently. The synergy premium embedded in strategic acquisition prices frequently accounts for thirty to fifty percent or more of the total consideration paid above the target's pre-announcement market price.

A financial acquisition is made by a private equity firm, hedge fund, or other financial sponsor whose primary objective is to generate investment returns through a combination of operational improvement, financial engineering, and eventual exit through a secondary sale or initial public offering. Financial acquirers evaluate targets through a leveraged buyout analysis framework, modelling the returns achievable when the acquisition is financed with a combination of equity capital contributed by the sponsor and debt secured against the target's assets and cash flows. They typically have less appetite for very high acquisition premiums than strategic buyers because their return model is sensitive to entry price in a way that strategic buyers' synergy economics sometimes are not.

The Hart-Scott-Rodino Antitrust Notification Requirement

The Hart-Scott-Rodino Antitrust Improvements Act of 1976, codified at 15 United States Code Section 18a, requires parties to certain acquisitions to file premerger notification reports with the Federal Trade Commission and the Antitrust Division of the Department of Justice and observe a mandatory waiting period before closing. The Act was enacted to give federal antitrust regulators the opportunity to review significant transactions before they are consummated, reversing the prior regime under which the government had to challenge anticompetitive transactions in court after the fact.

The filing obligation is triggered when three tests are simultaneously satisfied. The commerce test requires that at least one party be engaged in commerce affecting the United States. The size of transaction test, as adjusted for 2025, requires that the value of assets, voting securities, or non-corporate interests being acquired exceed one hundred and twenty-six point four million dollars — a threshold that is adjusted annually by the Federal Trade Commission based on changes in gross national product, having risen from one hundred and nineteen point five million dollars in 2024 and one hundred and eleven point four million dollars in 2023. The size of person test requires that one party have annual net sales or total assets of at least two hundred and fifty-two point nine million dollars and the other party have annual net sales or total assets of at least twenty-five point three million dollars, though this test does not apply at all when the transaction value exceeds the upper threshold, set at five hundred and five million dollars for 2025.

Once a filing is required, the parties must observe a thirty-day waiting period before closing the transaction — reduced to fifteen days for all-cash tender offers — during which the agencies review the filing and determine whether to request additional information through a Second Request. Issuance of a Second Request extends the waiting period and subjects the transaction to intensive antitrust scrutiny. Failure to file when required exposes parties to civil penalties of up to fifty-one thousand seven hundred and forty-four dollars per day of non-compliance.

SEC Disclosure Requirements for Public Company Acquisitions

When either the acquirer or the target is a public company with securities registered under the Securities Exchange Act of 1934, a comprehensive body of SEC disclosure rules applies to the transaction.

A public company that enters into a material definitive acquisition agreement must file a Current Report on Form 8-K with the SEC within four business days of execution, disclosing the material terms of the agreement and attaching the agreement itself as an exhibit. If the acquisition is financially significant to the acquirer — as determined under the significance tests set forth in SEC Regulation S-X Rule 1-02(w), which measure the relative size of the acquired business against the acquirer by reference to asset size, investment, and revenue — the acquirer must also file audited financial statements of the acquired business and pro forma financial information showing the combined entity's financial position and results of operations as if the acquisition had occurred at the beginning of the period presented.

When an acquirer seeks to acquire a public company through a negotiated merger requiring a shareholder vote, it must file a proxy statement or merger proxy with the SEC and distribute it to the target's shareholders, providing comprehensive disclosure about the terms of the transaction, the background of negotiations, the fairness opinion obtained from an investment bank, and the recommendation of the target's board of directors. The SEC reviews these proxy filings and frequently issues comment letters requiring additional or revised disclosure before the proxy can be declared effective and the shareholder vote scheduled.

Tender Offers and the Williams Act

When an acquirer seeks to purchase the shares of a public company target directly from its shareholders through a public offer — a structure known as a tender offer — the Williams Act of 1969, enacted as an amendment to the Securities Exchange Act of 1934, imposes a specific regulatory framework designed to protect target shareholders from coercive or inadequately disclosed acquisition tactics.

The bidder must file a Schedule TO with the SEC on the commencement date of the tender offer, providing detailed disclosure about the offer price, conditions to the offer, the bidder's background and financial condition, the source of funds being used to finance the offer, and the bidder's plans for the target following the acquisition. The tender offer must remain open for a minimum of twenty business days, and shareholders who tender their shares must have the right to withdraw them at any time during that period. The all-holders and best price rules, codified in SEC Rule 14d-10, require that the offer be made to all holders of the subject class of securities on equal terms and that the highest price paid to any one shareholder be paid to all shareholders.

Any person or group of persons that acquires beneficial ownership of more than five percent of a class of equity securities registered under Section 12 of the Exchange Act must file a Schedule 13D with the SEC within ten calendar days of crossing the five percent threshold, disclosing the identity and background of the acquirer, the source and amount of funds used to make the purchase, the purpose of the acquisition, and any plans the acquirer has with respect to the target company. An acquirer accumulating a position preparatory to a formal acquisition offer typically triggers this filing requirement well before any public announcement.

Purchase Accounting Under ASC 805

The accounting for acquisitions that qualify as business combinations under GAAP is governed exclusively by Accounting Standards Codification Topic 805, Business Combinations, which since its adoption eliminated the pooling of interests method and requires all business combinations to be accounted for using the acquisition method.

The acquisition method proceeds through four steps. The acquirer must first be identified — the entity that obtains control, which in the vast majority of transactions is the entity that transfers cash or issues debt consideration, though in stock-for-stock mergers identification of the acquirer requires careful analysis of which entity's former shareholders control the combined entity. The acquisition date must then be determined — typically the date on which the acquirer legally obtains control by closing the transaction and acquiring the shares or assets. All identifiable assets acquired and liabilities assumed must then be recognised and measured at their fair values as of the acquisition date, regardless of their carrying amounts on the target's books. Finally the acquirer must recognise goodwill — the excess of consideration transferred over the net fair value of identifiable assets and liabilities — or in the rare case where net fair value exceeds consideration, a bargain purchase gain recognised in current period earnings.

Goodwill and Intangible Asset Recognition

The recognition of goodwill and separately identifiable intangible assets is one of the most significant and judgement-intensive aspects of acquisition accounting.

Goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognised — in practical terms it captures the value of an assembled workforce, established customer relationships, brand recognition, and the synergies the acquirer expects to achieve, to the extent these are not separately measurable as identifiable intangibles. Goodwill is not amortised under US GAAP but is subject to annual impairment testing and more frequent testing whenever triggering events indicate that its carrying value may exceed its recoverable amount. A goodwill impairment charge reduces net income in the period recognised and can be material — major corporate transactions have produced goodwill impairments of tens of billions of dollars in subsequent years when anticipated synergies failed to materialise.

Separately identifiable intangible assets — including customer lists, trade names, patents, non-compete agreements, and in-process research and development — must be recognised apart from goodwill if they arise from contractual or legal rights or if they are separable, meaning capable of being sold, transferred, or licensed separately from the business. These identified intangibles are assigned finite useful lives and amortised accordingly, unlike goodwill, which means their recognition reduces goodwill and increases future amortisation expense, affecting both balance sheet presentation and future earnings.

Acquisition Financing Structures

Large acquisitions are rarely financed entirely from internal cash resources and typically involve a combination of financing sources that must be arranged and committed before announcement of the transaction.

Acquisition debt financing is typically arranged through a combination of secured bank credit facilities — a revolving credit facility providing liquidity and a term loan providing the bulk of the acquisition financing — and high yield bonds issued in the capital markets, with the specific mix depending on the size of the acquisition, the creditworthiness of the combined entity, and prevailing market conditions. Investment grade acquirers making large acquisitions may issue investment grade bonds directly rather than high yield instruments, taking advantage of their credit ratings to access capital markets at lower cost. Bridge loans provided by investment banks allow acquirers to commit to and close acquisitions before permanent financing is arranged, with the bridge facility subsequently refinanced through capital markets transactions.

Stock consideration allows the acquirer to preserve cash and limit leverage by issuing new shares to the target's shareholders as part or all of the acquisition consideration. This dilutes existing shareholders of the acquirer but may be preferable when the acquirer believes its shares are attractively valued relative to the target, when the acquisition is large relative to the acquirer's balance sheet, or when the target's shareholders wish to participate in the upside of the combined entity. Mixed consideration structures combining cash and stock are common in large transactions, giving both parties flexibility while limiting the drawbacks of either pure approach.

Hostile Acquisitions and Defensive Measures

Not all acquisitions are welcomed by the target company's board and management. When an acquirer makes a bid that the target's board has rejected or not approved, the acquirer may attempt a hostile takeover by going directly to the target's shareholders through a tender offer or a proxy contest to replace the target's board with directors who will approve the transaction.

Target companies facing unwanted acquisition approaches have developed a range of defensive measures over decades of takeover jurisprudence. The shareholder rights plan, commonly called a poison pill, entitles existing shareholders to purchase additional shares at a substantial discount when a hostile bidder acquires more than a specified threshold of shares — typically between fifteen and twenty percent — effectively diluting the hostile bidder's ownership and making the acquisition prohibitively expensive unless the board approves the transaction. A staggered board, in which only a portion of directors stand for election each year, prevents a hostile acquirer from winning immediate control of the board even after winning a proxy contest, since replacing all directors takes multiple annual meeting cycles. White knight defences involve the target's board actively soliciting a preferred alternative acquirer whose offer is superior to the hostile bid.

FINRA Obligations When Broker-Dealers Are Involved

When acquisitions involve the transfer of a registered broker-dealer — either as the target of an acquisition or as a subsidiary being sold — specific FINRA regulatory obligations arise that are separate from and in addition to the SEC and antitrust requirements applicable to the corporate transaction itself.

FINRA requires member firms undergoing changes in ownership or control resulting from a merger or acquisition to file a continuing membership application or a new membership application with FINRA, depending on the nature and extent of the change. FINRA reviews these applications to assess whether the proposed new ownership and management structure satisfies the standards for FINRA membership, including financial responsibility, supervisory capacity, and absence of relevant disciplinary history. Customer accounts at a broker-dealer being acquired must be handled in accordance with FINRA rules governing the transfer of customer assets, and registered representatives of the acquired firm must have their registrations properly updated in the Central Registration Depository to reflect the new employing firm.

Examination Relevance and Key Takeaways

Acquisitions are tested across the SIE, Series 7, and Series 79 examinations in the context of corporate finance, securities regulation, financial statement analysis, and the regulatory framework governing public company transactions. Candidates must understand the structural forms acquisitions take, the Hart-Scott-Rodino filing thresholds and waiting period, the Williams Act requirements governing tender offers including Schedule TO, the all-holders and best-price rules, the Schedule 13D five percent beneficial ownership reporting threshold, purchase accounting under ASC 805 including goodwill recognition and intangible asset identification, and FINRA obligations when broker-dealers are acquired.

The core points to retain are these: an acquisition gives the acquirer control over the target and can be structured as a stock purchase, asset purchase, or merger with each structure carrying distinct legal and tax consequences; the Hart-Scott-Rodino Act requires premerger notification and a thirty-day waiting period when transaction value exceeds one hundred and twenty-six point four million dollars as of 2025, with civil penalties of up to fifty-one thousand seven hundred and forty-four dollars per day for failure to file; public company acquisitions trigger extensive SEC disclosure obligations including Form 8-K within four business days of signing and proxy statement or Schedule TO filings depending on whether the transaction is structured as a negotiated merger or a tender offer; the Williams Act requires Schedule TO filing, a minimum twenty-business-day offer period, withdrawal rights, and the all-holders and best-price rule under SEC Rule 14d-10 for tender offers; all business combinations are accounted for under ASC 805 using the acquisition method requiring fair value measurement of all identifiable assets and liabilities and recognition of goodwill as the excess of consideration over net assets; and FINRA requires continuing or new membership applications when a broker-dealer changes ownership as a result of an acquisition.