Quick Answer
The banker assesses how a deal is structured separately from what is sold. Stock sales transfer the seller's equity, including all liabilities, and are typically seller-preferred for capital-gain treatment. Asset sales transfer cherry-picked assets, giving the buyer a basis step-up and liability shield. A merger requires a shareholder vote; a tender offer solicits shareholders directly and can close faster.
A sale of an entire company can be structured as a stock sale or an asset sale, and the transfer can be executed as a merger or a tender offer. These choices are independent: a stock sale can happen by merger or by tender; an asset sale almost always happens by direct purchase contract (asset purchase agreement) outside the tender-offer framework.
How Do Stock Sales and Asset Sales Differ?
| Feature | Stock Sale | Asset Sale |
|---|---|---|
| What transfers | The seller's equity (shares) | Cherry-picked assets and assumed liabilities |
| Tax basis | Buyer inherits seller's historical basis (no step-up) | Buyer steps up to fair-market value; deducts goodwill amortization over 15 years under the acquired-intangibles amortization provision |
| Successor liability | Buyer assumes ALL liabilities, known and unknown | Buyer assumes only liabilities expressly listed in the asset purchase agreement |
| Contract assignment | Contracts transfer with the entity (change-of-control clauses may still trigger) | Contracts must be individually assigned, often requiring counterparty consent |
| Seller preference | Generally preferred (single-level capital-gain treatment) | Generally disliked (double tax for a C-corp seller: corporate gain on asset sale + shareholder dividend tax) |
| Buyer preference | Disliked (no basis step-up; inherits unknown liabilities) | Generally preferred (step-up + liability shield) |
Think of it this way: a stock sale is like buying a house and taking everything inside: furniture, the leaky roof, the pending zoning dispute, the loan secured against the property. An asset sale is like buying the house unfurnished after the seller stripped out anything not nailed down and disclaimed the leaky roof: you get title to the structure, but unknown problems stay with the seller.
Exam Tip: Gotchas
- An asset sale gives the BUYER the basis step-up and the liability shield but costs the SELLER double tax (for a C-corp). That mismatch is why most cross-the-table negotiations land on a stock sale unless an election bridges the gap (the deemed-asset-sale joint election, covered in the tax-coordination section).
- Contract assignment is the asset-sale headache. Major customer contracts, leases, and software licenses often have anti-assignment clauses that require counterparty consent. A poorly planned asset sale can lose key contracts at closing.
How Do Mergers and Tender Offers Differ as Structure Choices?
The transfer mechanism is independent of what is being transferred. A merger is a board-approved combination; a tender offer is a direct offer to shareholders.
Merger:
- Board-approved transaction where the target merges into the buyer (or the buyer's subsidiary), or vice versa, by operation of state corporate law
- Requires target board approval, target shareholder vote, and (for stock consideration) filings under the merger-registration provisions
- Standard for friendly negotiated deals
- Provides a clean, single-step path to 100% ownership without the back-end mechanics of a tender offer
Tender offer:
- The buyer offers directly to the target's shareholders to purchase their shares for cash, stock, or a combination
- Can be friendly (negotiated with the target board) or hostile (made without board approval)
- Followed by a back-end merger to acquire the remaining shares. Under some state statutes, that merger can proceed without a separate target shareholder vote when the transaction satisfies the statute's conditions and applicable adoption threshold. This vote-free back-end path is distinct from a traditional short-form merger based on the parent's existing high ownership (covered in the Tender Offer Regulations unit)
- The Williams Act tender-offer mechanics (the schedule filing, the 20-business-day minimum offer period, the best-price rule, the proportionate-acceptance rule, and the all-holders rule) are covered in the Tender Offer Regulations unit
- Faster path to control than a merger when the buyer can persuade shareholders directly
What Is the Sell-Side Banker's Role in the Structure Choice?
The seller's banker advises whether to insist on a merger or accept a tender offer structure.
Reasons to insist on a merger:
- Cleaner transaction; one closing event
- Full diligence opportunity before signing
- Greater seller leverage during definitive-agreement negotiation
- Easier path to a fairness opinion presentation alongside the board vote
- Avoids signaling buyer urgency to the market
Reasons to accept a tender offer structure:
- Faster path to closing (especially with a cash tender, which has a shorter HSR waiting period; see the antitrust-coordination section)
- Buyer is willing to commit capital quickly and avoid a long pre-closing period
- Target board lacks confidence in a definitive negotiated price and wants to test the market
Exam Tip: Gotchas
- "Merger vs tender offer" in the sell-side context is a structural choice between board-and-shareholder-vote sequence (merger) and shareholder-direct-to-shareholder solicitation (tender). Williams Act mechanics that govern the tender side belong to the Tender Offer Regulations unit.
- Tender offers are more common when the buyer wants SPEED. A buyer that needs to lock down a deal before a competitive bidder emerges may prefer the tender route; a seller that wants leverage during the post-signing period may prefer a merger.
- Stock-for-stock tender offers exist but are rare. Most tender offers are cash because the registration mechanics for stock-tender offers complicate the timeline.
What Should You Check on Exam Day?
- Know that a stock sale transfers all liabilities (known and unknown) while an asset sale transfers only expressly listed liabilities.
- Remember that an asset sale gives the buyer a basis step-up (goodwill amortized over 15 years) and a liability shield, but generally costs a C-corp seller double tax.
- Know that a merger requires target board approval and a shareholder vote, while a tender offer is a direct offer to shareholders (friendly or hostile) with a shorter HSR waiting period when cash, making it a faster path to closing.
- Know that contract assignment is the key asset-sale headache because anti-assignment clauses often require counterparty consent.
- Remember that stock-for-stock tender offers are rare because the registration mechanics complicate the timeline.