What is a Bust-Up Acquisition?

A bust-up acquisition is the purchase of a business in which the buyer then sells some of the acquiree’s assets in order to pay for the acquisition. This situation is most common when the buyer has funded the acquisition primarily with debt, and the acquiree has a significant proportion of undervalued assets that can be readily sold off. The buyer will not know if this strategy is successful until after it has completed the acquisition transaction, so it takes on a major risk that it can realize significant value from the sale of the acquiree’s assets.

Advantages of a Bust-Up Acquisition

While there are risks associated with a bust-up acquisition, there are also several major advantages to this approach, which are as follows:

Monetize assets. By selling off the assets of an acquiree, you can generate cash in short order and use it to pay down the debt used for the acquisition.
Focus on core competencies. By selling off selected assets, you can tighten the strategic focus of the acquired entity on those areas that comprise its core competencies.
Reduce overhead costs. As part of the bust-up process, you will likely eliminate the overhead costs associated with those assets being sold off. This results in a lower-overhead and more efficient operation.