M&A 4/5

Question 1

Which acquisitions structures allow the Acquiring company to transfer the tax attributes of the Target company

Answer 1

• taxable stock

- nontaxable forms

Question 2

What are the 2 restrictions on NOL carryovers

Answer 2

• SRLY Limit - pre-acquisition NOLs can only be used to offset post- acquisition income generated by Target or Target’s assets
• Sec 382 Limit - annual limit on amount of pre-acquisition NOL c/o = FMV of Target stock before acquisition x Long term tax exempt interest rate at ownership change

Question 3

How much more should Acquiring company be willing to pay for a Target with NOLs over an identical Target with no NOLs

Answer 3

the premium Acquirer should be willing to pay is the PV of the tax savings from the NOLs

Question 4

what factors affect how much Target’s NOLs will sell for

Answer 4

• discount rate, tax rate
• Acquiring Co’s ability to use NOLs - have to have income to offset against
• how soon they expect to use NOLs- sooner the better
• competition
• Target’s ability to use NOLs on their own - if they can use them they will charge more

Question 5

What happens to the tax attributes, including NOLs, of Target Co following a 338 step-up election

Answer 5

all tax attributes are eliminated

Question 6

Conceptually, what is the decision model for determining whether or not to make the 338 election, given Target Co has NOLs

Answer 6

compare the NPV of the costs/tax benefits of making the election (tax savings from step up) to the PV of NOLs that you get if you do not take the election

Question 7

How can Target’s NOLs be used in the 338 decision process

Answer 7

1. you must calculate the PV of the tax benefit from using the NOLs if no election = PVTNOL
2. NOLs can be used to offset the TAX338 from the pretend sale, cannot generate a loss (limited to Price - TASSETB)

Question 8

how might the comparison n to use NOL versus n to capture tax benefits from basis step up affect the 338 decision

Answer 8

• the sooner you can capture the benefits, the better
• if the holding period for NOLs > holding period of the step, more likely to take election because PV NOLs will decrease

Question 9

Why do corporations divest business segments/subsidiaries

Answer 9

• raise cash
• eliminate under-performing businesses
• eliminate business that does not fit with other business lines
• correct a market mispricing
• appease regulators
• align incentives of subsidiary managers

Question 10

what is a spin-off and what are its tax features

Answer 10

• corporation takes subs and creates a second company with a separate set of F/S and stocks
• no cash = no tax

Question 11

what is an equity carve out?

Answer 11

• sell a slice of a sub to get it into the market and correct its value (market has most likely been mispricing it)
• get cash = taxes as a sale of sub

Question 12

What does a 338(h)(10) election do

Answer 12

treats the stock sale of a sub as an asset sale, so basis is stepped up to purchase price, gain or loss computed in reference to the asset basis not stock basis

Question 13

In a non-tax sub sale, what is the basis for the selling company, for the acquiring company

Answer 13

• seller = takes a substituted basis in the stock received = basis of sub sold (essentially carryover)
• buyer = takes carryover basis of sub

Question 14

why might a tax free sale of a sub might not be desirable

Answer 14

there are two potential gains that both the buyer and the seller of the sub could be taxed on upon subsequent sale of stock

Question 15

what is the key difference between a standard 338 election and a 338(h)(10) election

Answer 15

both parties must agree to make election (jointly) and the asset sale treatment applies to both parties

Question 16

what is the relationship between stock basis and asset basis and the sellers preference for 338(h)(10) election

Answer 16

• stock > asset = no 338(h)(10)
• stock = asset = indifferent
• asset > stock = 338(h)(10)
• **want to minimize the gain that will be recognized/taxed to maximize after tax wealth

Question 17

what is the relationship between purchase price and asset basis and the buyers preference for 338(h)(10) election

Answer 17

• price > asset basis = prefer 333(h)(10)
• price = asset basis = indifferent
• price < asset basis = no 338(h)(10)

Question 18

how does the acquiring companies preference for a 338(h)(10) election vary with carry over asset basis

Answer 18

increases as carryover asset basis decrease, get more tax savings from the basis step up

Question 19

how does the price that the Acquiring company is willing to pay for a 338(h)(10) election change as amortization period increases

Answer 19

DECREASES - they will pay less because they do not get tax saving as soon, as n decreases Price338(h)(10) increases

Question 20

when does a 338(h)(10) election make sense

Answer 20

when Target Sub asset basis > Target Co’s stock basis in Sub => get same price but have less of a taxable gain (price has to be greater than Asset Basis)

Question 21

Why is a 338(h)(10) election more common than a normal 338 election

Answer 21

the 338(h)(10) does not add another level of tax onto the transaction - does not trigger the corporate level tax

Question 22

if 338(h)(10) is elected, how is purchase price allocated

Answer 22

-purchase price allocated to assets based on relative FMVs, anything residual goes to goodwill

Question 23

if 338h10 election is not made, what is the buyer’s basis in sub’s assets

Answer 23

carryover basis

Question 24

if 338h10 election is made, what is the buyer’s basis in sub’s assets

Answer 24

TASSETB = PURCHASE PRICE