Investing in acquisition depends a lot on the solvency of the business acquiring the assets. In United States, the law permits an investor to acquire and own shares in a company without the need for ownership (subject to certain conditions). An important condition is that the shares should be fully paid up and no partial payments should be made. One of the advantages of such an Acquiry acquisition is the ability to increase the cash flow. For this reason, it is very often that investors are attracted to acquire businesses with a relatively low cost of capitalization. However, as with all acquisitions, acquisition and investment also carry some risks, which we will discuss below.
The first risk that we will look at relates to the potential liquidity of the acquiring company’s assets after the acquisition is complete. If there are only a limited number of shares issued under the owner’s control or if the issued shares are under-priced relative to the price that they would fetch on the open market, then there will be only a limited amount of liquidity once the acquisition is complete. This is due to the limited amount of capital that was used in the purchase and the ongoing interest payments that must continue to the previous owners.
The second risk relates to cash outflow after the acquisition and investment activity has concluded. Cash outflow can be negatively impacted by the timing of any particular investment decision or series of decisions that result in an outlay that is not effectively managed. For example, if too many acquisitions are made at the start of the business cycle then the downside impact on liquidity will be negative nine times out of every ten times. Similarly, if too few investments are made during the start of the business cycle then this also tends to result in a significant downside impact nine out of every ten times. Therefore, it is important to understand the strategies that a company adopts to mitigate any potential downside impact on liquidity during the course of its acquisition and investment activities.
There are two additional risks that arise from the nature of the business environment and business cycle that have been addressed in the preceding section. One relates to the possibility of the shares of ownership diluting into other shares and this is called dilution of control. The other relates to the exposure of holders of the common equity or common stock to involuntary conversions into shares of the corporation’s common stock. While the laws generally do not permit the conversion of non-convertible securities, the nature of the business can result in an involuntary conversion of shares of the corporation’s common stock if the acquisition is made in the stock exchange.
The last risk relates to the potential tax liability arising from the acquisition and investment activity. If a foreign subsidiary is included in the debt and equity method of financing used to finance the acquisition and /or the investment, then the taxation of the transaction will be affected by the status of the foreign subsidiary as an exempted foreign source. Specifically, if the subsidiary is deemed to be an exempt foreign source, then the tax regulations applicable to domestic corporations become applicable to the acquisition and investment activity.
The acquisition and investment process are not straightforward. The process begins with a company filing an application, generally with the name of the primary C&I, and an agent or attorney representing the company. The application for registration with the SEC is referred to as an “application for registration” and must be accompanied by an offer of acquisition. Also required is a “solicitation”. That is, the company must submit to the underwriters a complete and detailed solicitation document, which often includes a discussion of the acquisition and its proposed financial instruments.