Mergers & Acquisitions Lecture 2

Question 1

What are the considerations in deciding the form of the reorganisation?

Answer 1

1. Tax implications > tax levels + step-up possible?
2. Control > dissenter’s rights and minority shareholders squeeze out?
3. Risk exposure > exposure to undisclosed liabilities?
4. Continuity > renegotiation of contracts?
5. Form of payment > limitations on deal structure?

Question 2

Mergers vs Acquisitions (takeover A/L – target exist after deal –approval shareholders –exposure to L –tax step-up –use of tax loss carry forward)

Answer 2

Mergers // Acquisitions
- takeover A+L // takeover some or all A or L
- target ceases to exist // target may continue to exist
- requires approval both shareholders // typically only target shareholders
- exposed to all disclosed and undisclosed liabilities // may be shielded from some/all disc./undisc. liabilities (depends on structure transaction)
- cannot step-up tax basis // may be able to step-up (depends on structure transaction)
- can use TLCF // may be able to use TLCF (depends on structure transaction)

Question 3

Which 2 forms of ACQUISITION reorganisations are there?

Answer 3

1. Purchase of assets: some or all, with or without liabilities. The target shell usually continues to exist as the legal owner of consideration of the target’s liabilities (until it’s liquidated)
   > private companies can only be sold in a purchase of asset transaction
   //
2. Purchase of stock: some or all of the target. The target may or may not continue to exist.

Question 4

Purchase of stock vs Purchase of assets (corporate level tax –shareholder level tax –use TLCF –step-up –shielded from undisc. liabilities – reassignment contracts)

Answer 4

Purchase of stock // Purchase of assets
- no // yes
- yes // yes
- yes // no
- no // yes
- no* // yes
- no // yes
///
* in some cases the buyer may be able to insulate itself more from potential liabilities

Question 5

How do you calculate the value to the acquirer of the basis step-up?

Answer 5

1. Stepped-up asset value = purchase price – tax basis = $100 - $40 = $60
2. $60 amortised over 15Y would result in $1.60 in tax savings each year > $60*40%/15 = $1.60 (corporate tax rate = 40%)
3. PV of 15Y annuity if $1.60 discounted at cost of debt of 8% = $13.70

Question 6

When is a transaction tax-free and when is it taxed?

Answer 6

A taxable transaction generally occurs when cash, debt, or some non-equity consideration is used to purchase the target’s stock or assets.
//
A tax-free transaction occurs when the acquirer’s or buyer’s stock is used to purchase substantially all of the target’s stock or assets.
> though, it is not tax-free but tax-deferred. The target shareholders must pay capital gains tax whenever they choose to sell the shares they received as a consideration in the deal.
> Depending upon the country, other additional conditions may also need to be satisfied for a deal to qualify as a tax-free transaction. In most countries, a tax-free transaction requires that (i) minimum 50% of the deal consideration is paid with acquirer stock and (ii) the buyer continues with the business of the target for at least two years following the acquisition.

Question 7

What are dissidenter’s rights?

Answer 7

Also known as appraisal rights = when shareholders do not agree with the merger/acquisition, they can demand that the firm buys back their shares at a fair value. It is determined in an appraisal process. It can be used even if the shareholders did not vote in favour of the deal.

Question 8

Remember…

Answer 8

Private companies can be sold only in a purchase of asset transaction!