M&A 2 Flashcards
what are the steps in a 338 election
- pretend sale of Target’s assets for purchase price of ADSP
- 1 day real return on the pretend sale - creates a real tax liability (TAX338)
- Basis in Target’s assets = ADSP - tax basis goodwill can be created if their is a book-tax basis difference
what conditions would make the asset basis step up of a 338 election more desirable than normal taxable stock purchase
- higher tax rates expected in the future - get more in depreciation tax savings in future periods
- deferral/depreciation period is shorter - tax savings sooner (PV is more), plan on selling the asset soon (gain on sale will be less)
- PV tax savings > TAX338 paid today on pretend sale
- Target has NOLs that are about to expire
would Target S/Hs accept a higher or lower price to have an acquisition structured as tax. stock versus tax. asset, why
they would accept a lower price in order to capture the benefits of a deferred corporate level tax, think of example: accepted stock for 7,900 versus 10,000 cash for asset acquisition
given that purchase price is the same regardless of purchase type, how would the acquiring corporation prefer to structure an acquisition
prefer asset acquisition (as long as stock generates a gain) because of the additional savings from future depreciation due to stepped up basis
why won’t acquiring company pay as much for a taxable stock purchase as a taxable asset purchase
they will not get as much in depreciation tax savings
they will have to pay the deferred corp level tax upon sale of the stock
when is the corp level tax that is deferred using the taxable stock acquisition recognized
- when asset is fully depreciate - acquiring co will have lost depreciation tax savings
- upon sale of the stock/asset
how do you find the benefit of the corporate level tax deferral for acquiring company
- take the difference between the depreciation schedules (this is the gross benefit from the step up)
- discount annual depreciation difference to present value
- subtract this from the corporate level tax (that would have been paid in a taxable asset purchase)
as n increases, what happens to the maximum price the acquiring company is willing to pay for a tax stock purchase over a asset acquisition
the price increases because the acquiring company is not able to use the tax savings from the basis step up as soon into the future (PV decreases so total cost increases) –> because cost of tax asset purchase increase, acquiring co is more willing to make a taxable stock purchase
how do we gauge who is benefitting more from the tax stock structure, acquiring co or target co
Look at PRICE, whoever’s reservation price is furthest from the agreed price is capturing more of the benefits, SO when either side settles for their indifference point, the other side captures all of the benefits –> look at MA2 problem 7(v)
