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Tax and Business Strategy > M&A I > Flashcards

M&A I Flashcards

1
Q

What are three reasons for mergers and acquisitions?

A

(1) For strategic reasons (economies of scale, acquire workforce, acquire tech, reduce competition, secure tax benefits)
(2) To extend control of management (control more assets, secure larger salaries, and greater job security)
(3) To transfer wealth across stakeholders (transfer from b/h to s/h)

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2
Q

When is a M&A considered successful?

A
  • When multiple synergies are realized
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3
Q

What are the four basic types of business combos?

A
  • Consolidation
  • Statutory merger
  • Stock acquisition
  • Asset acquisition
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4
Q

What is a consolidation?

A
  • Two separate co. join to form a new co.
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5
Q

What is a statutory merger?

A
  • One co. acquires direct control of all assets of another co.
  • Acquirer gen. required to assume liabilities of target
  • Target co. no longer exists
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6
Q

What is a stock acquisition?

A
  • One co. acquires control of o/s shares of another co.

- Both remain in existence

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7
Q

What is an asset acquisition?

A
  • One co acquires assets (but maybe not the liabilities) of target co.
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8
Q

What is the outcome in a consolidation?

A
  • Two corp. agree to merge and form new corp.

- S/Hs for ea. co. exchanges shares of old companies for shares in new combined entity

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9
Q

What is the outcome in a statutory merger?

A
  • Acquiring co. pays for assets of target co. w/ combo of acquiring co. stock and other property (e.g. cash)
  • Consideration received by target is distributed to target S/Hs and Target is liquidated
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10
Q

What is the outcome in a stock acquisition using cash?

A
  • Acquiring Co. pays cash to S/Hs of Target Co.
  • S/Hs in Target no longer has an investment in co.
  • Acquiring Co. owns stock of Target Co.
  • Target Co. remains in existence unless liquidated by the Acquiring Co.
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11
Q

What is the outcome in a stock acquisition using stock (of the acquirer)?

A
  • Acquiring Co. issues its shares to S/Hs of Target Co.
  • In exchange for shares of Target Co.
  • S/Hs of Target now owns shares in Acquiring Co.
  • Acquiring Co. owns stock of Target Co.
  • Target Co. remains in existence unless liquidated by Acquiring Co.
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12
Q

What is the outcome of an asset acquisition using cash?

A
  • Acquiring Co. pays cash for the assets of Target Co.
  • Target Co. is still in existence and is owned by its S/Hs
  • Target’s primary asset is now cash (or other consideration received from asset sale)
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13
Q

What is the outcome of an asset acquisition using stock (of the acquirer?

A
  • Acquiring Co. issues its shares to Target for assets of Target Co.
  • Target is still in existence and is owned by its S/Hs
  • Target’s primary asset is now stock of Acquiring Co.
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14
Q

What does post 2001 US GAAP require the use of to account for business combo?

A

Acquisition method

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15
Q

What does the acquisition method of accounting require?

A
  • Assets and liabilities of acquired entity be reflected at fair values
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16
Q

What are five non-tax issues associated with M&As?

A
  • Transaction costs (investment banking fees, info costs, financing costs)
  • Contingent liabilities (unknown liabilities of Target Co. could affect combo structure)
  • Transferability of assets (might be difficult/costly to transfer title to certain assets in an asset acquisition)
  • Managerial control (management of acquiring co. may want to structure transaction as it doesn’t dilute ownership)
  • Financial accounting (goodwill and purchase price allocation)
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17
Q

Define purchase price allocation.

A
  • An application of goodwill accounting where acquiring co. (when purchasing target co) allocates purchase price into various assets and liabilities acquired from transaction
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18
Q

Purchase price allocations are performed in conformity with what method of merger and acquisition accounting?

A

Purchase method

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19
Q

What does the form of an M&A transaction affect (6 things)?

A
  • Amount of taxes paid
  • Timing of tax payments (pay tax now or later)
  • Who pays taxes (Target Co., Target S/Hs, Acquiring Co)
  • Character of income (ordinary or capital)
  • Treatment of tax attributes (carry forwards, credits, income characterization) of target company
  • Whether or not tax basis goodwill is created
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20
Q

Tax basis goodwill and other intangibles are amortized straight-line for tax purposes over how long?

A

15-year period (see IRC Sec. 197)

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21
Q

What does the term Sec. 197 intangible mean?

A
  • Goodwill
  • Going concern value
  • Workforce in place including its composition and terms and conditions of its employment
  • Business books and records, operating systems, or any other info base
  • Patents, copyrights, formulas
  • Customer-based intangible (i.e. market share)
  • Supplier-based intangible
  • Any other similar item
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22
Q

Corporations are generally subject to double taxation. Is this double taxation preserved in business combos?

A

Yes (always consider corporate and S/H level effects)

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23
Q

For tax purposes, business combos can be classified into what two broad classes depending on the asset that is purchased by the Acquiring Co?

A
  • Asset Purchase (Taxable or Nontaxable)

- Stock Purchase (Taxable or Nontaxable)

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24
Q

For tax purposes, when is a business combo classified as an asset purchase nontaxable?

A

When it is a

  • Type A merger or consolidation (IRC Sec. 368 (a)(1): Generally must consist of 50% or more of Acquirer’s CS
  • Type C reorganization (IRC Sec. 368 (a)(1)(C)):
    Generally must consist of more than 80% of Acquirer’s CS
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25
Q

For tax purposes, when is a business combo classified as a stock purchase nontaxable?

A

When it is a
- Type B stock for stock acquisition (IRC Sec. 368(a)(1)(B)): Consideration must consist entirely of stock of of Acquirer

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26
Q

In a taxable stock purchase, what can the Acquiring Co. elect to do?

A
  • Make a Sec 338 election
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27
Q

What will a Sec. 338 election in a taxable stock purchase cause?

A
  • Causes corporate level tax to be paid on the built in gain related to Target’s assets and generate a tax basis step up in Target’s assets
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28
Q

What will a Sec. 338 election generate a tax result similar to?

A

Similar to that from a taxable asset purchase

29
Q

Tax Consequences of:

Taxable Asset Purchase for Target Co.

A
  • Target Co. recognizes G/L on sale of its assets

- Co. still exists unless liquidated

30
Q

Tax Consequences of:

Taxable Asset Purchase for S/Hs of Target Co.

A
  • No effect unless co. liquidates after asset sale

- If co. liquidates, S/H acts as if shares are sold for consideration received (recognize G/L)

31
Q

Tax Consequence of:

Taxable Asset Purchase for Acquiring Co.

A
  • Basis in assets = acquisition price

- Tax basis goodwill could be recorded

32
Q

Tax Consequence of:

Taxable Asset Purchase for S/Hs of Acquiring Co.

A
  • No effect
33
Q

Tax Consequence of:

Non-Taxable Asset Purchase for Target Co.

A
  • Target liquidates

- Distributes all property to its S/Hs (primarily stock in Acquiring co.)

34
Q

Tax Consequence of:

Non-Taxable Asset Purchase for S/Hs of Target Co.

A
  • No G/L recognized unless boot received (property other than stock of Acquirer)
  • Basis new shares = FMV new shares - PP gain + PP loss
35
Q

Tax Consequence of:

Non-Taxable Asset Purchase for Acquiring Co.

A
  • Carryover adjusted basis in asset of Target Co.
36
Q

Tax Consequence of:

Non-taxable Asset Purchase for S/Hs of Acquiring Co.

A
  • Gain recognized if boot received in Type A consolidation

- Otherwise no effect

37
Q

Tax Consequence of:

Taxable Stock Purchase for Target Co.

A
  • Target Co. continues on (under new owners)
  • Tax basis of assets carries over to new owners
  • Unless Sec. 338 election is made, then Target’s tax basis of assets is stepped up and tax basis goodwill is recorded
38
Q

Tax Consequence of:

Taxable Stock Purchase for S/Hs of Target Co.

A
  • Sold shares for consideration received

- Recognize G/L for taxes purposes = FMV received less adjusted basis in stock

39
Q

Tax Consequence of:

Taxable Stock Purchase for Acquiring Co.

A
  • Acquiring Co. owns stock of Target Co.
  • Acquiring Co. basis in stock of Target is its acquisition cost (if make Sec. 338 election can record tax basis goodwill)
40
Q

Tax Consequence of:

Taxable Stock Purchase for S/Hs of Acquiring Co.

A

No effect

41
Q

Tax Consequence of:

Non-Taxable Stock Purchase for Target Co.

A
  • Target co continues on (under new owners)
42
Q

Tax Consequence of:

Non-Taxable Stock Purchase for S/Hs of Target Co.

A
  • No G/L recognized
  • Basis in shares of Acquiring Co =
    FMV Acquiring Co. shares - PP gain + PP loss
43
Q

Tax Consequence of:

Non-Taxable Stock Purchase for Acquiring Co

A
  • Target Co still exists

- Acquirer’s basis in stock of Target is carryover basis from Target’s S/Hs

44
Q

Tax Consequence of:

Non-Taxable Stock Purchase for S/Hs of Acquiring Co.

A

No effect

45
Q

Why may the book value and tax basis diverge over time?

A

Maybe due to different depreciation/amortization methodologies:

  • Straight line depreciation for accounting purposes
  • Accelerated depreciation for tax purposes
46
Q

What is the taxable G/L recognized by the seller of the stock/asset equal to?

A

= purchase price less tax basis in stock/asset sold

47
Q

When a transaction results in a gain, the seller’s tax burden is determined by what factors?

A

Whether…

  • Transaction taxable/nontaxable
  • Seller is taxable/tax-exempt
  • Gain is taxed as ordinary income or capital gain
  • Selling’s holding period
  • Applicable tax rate
48
Q

What are the two types of tax basis?

A
  • Inside basis

- Outside basis

49
Q

What is inside basis?

A
  • The tax basis that a co. has in its “assets”
50
Q

What is outside basis?

A
  • Tax basis S/H has in “shares” of company
51
Q

What were the two permissible methods to account for M&A transactions under APB no. 16?

A
  • Purchase method

- Pooling method

52
Q

Explain the purchase method under APB no.16.

A

Purchase method:

  • Treat as if Acquiring Co. purchased Target Co. for FMV
  • Goodwill recorded when price paid to acquire target exceed FMV of target’s identifiable assets
  • Goodwill amortized over period not to exceed 40 years
  • Prior period F/Ss not restated to reflect acquisition
  • B/S of target firm restated to FMV and merged with acquiring firm’s B?S as of acquisition date
53
Q

Explain the pooling method under APB no.16.

A

Pooling method:

  • Concept underlying method is “continuity” of combined enterprise
  • Acquired firm’s assets not revalued
  • Post combo B/S reflects combined BVs of both firms
  • Prior period F/Ss restated to include both companies (combo is retroactive)
54
Q

What was the key difference b/w the purchase method and pooling method under APB no. 16?

A
  • Purchase: required Target’s assets to be restated to FMV (and goodwill to be recorded if purchase price exceeded net FMV of target’s identifiable assets)
  • Pooling: required Target’s assets remain at BV
55
Q

What are the two current standards that apply to M&A transactions?

A

ASC 805 and ASC 350

56
Q

What does ASC 805 require for M&A transactions?

A
  • Eliminated pooling method
  • Requires acquisition method of accounting for all acquisitions (similar to purchase method)
  • Requires Target Co. assets and liabilities to be recorded at FMV of assets
57
Q

What does ASC 350 govern?

A
  • Governs accounting treatment for any recorded book-basis goodwill
58
Q

What does ASC 350 require for M&A transactions?

A
  • Goodwill is not amortized for book purposes
  • Instead, subject to annual impairment test
  • If impaired, an expense reflecting this decline in value is recorded on the I/S and BV of goodwill on the B/S is reduced to reflect this decline
59
Q

For income tax purposes, what is deductible under IRC Sec. 197?

A
  • Tax basis goodwill and other intangible assets (provision mandates 15-year life on such intangibles and straight-line amortization method)
60
Q

What do you need to know to compute deferred tax liability amounts?

A

Tax basis

61
Q

How many levels of current tax are there in a taxable asset purchase?

A

Two levels of current tax

62
Q

Who is effectively bearing the burden of the tax in a taxable asset purchase?

A

Target S/H

63
Q

How many levels of current tax are there in a taxable stock purchase?

A
  • One level of current tax at S/H level

- Corporate tax is deferred

64
Q

In a taxable stock purchase, when does the target company recognize PP gain, if any?

A

PP gain recognized

  • when assets sold or
  • through lower depreciation
65
Q

Who is effectively bearing the burden of the tax in a taxable stock purchase?

A

Tax burden of both levels of tax is still on

- Target S/H

66
Q

Who has to pay the deferred level of corporate tax in the future for a taxable stock purchase?

A

Acquiring co.

67
Q

If you’re a target S/H, would you require more or less consideration for a non-taxable acquisition (vs. taxable acquisition)?

A
  • Willing to accept less for tax free acquisition

- B/c tax is deferred

68
Q

In a nontaxable stock purchase, when is S/H level tax recognized?

A
  • Deferred

- Recognized when stock is sold in future

69
Q

ASC 740-10-25-3d disallows the recognition of what?

A

A DTL relating to goodwill that is not deductible for tax purposes

Tax and Business Strategy (9 decks)

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