M&A V: Corporate Divestitures Flashcards
Why do corporations often divest business segments (or subsidiaries)?
- To eliminate an underperforming business
- To eliminate a business that does not fit well with other business lines
- To raise cash
- To correct market mispricing
- To align incentives of subsidiary managers
- To appease regulators
A sale of a subsidiary can be completed as what two types of transactions?
- Non-taxable transaction
- Taxable transaction
The buyer and seller may, for tax purposes, elect to treat a taxable stock sale as what?
- Taxable asset sale by filing an election under IRC Sec. 338(h)(10)
A non-taxable sale of a subsidiary is structured and treated similarly to what?
- Tax-free acquisition of a freestanding C-corporation
The consideration in a tax-free subsidiary sale is generally what?
- Stock of the acquiring company
In a tax-free subsidiary sale, the selling company takes what basis in the stock received?
- Substituted basis in stock received (i.e. basis of stock received is assigned the stock basis of the sold subsidiary)
In a tax-free subsidiary sale, the acquiring company takes what basis in the subsidiary’s stock and assets?
- Carryover basis
What are three ways a corporation can divest a subsidiary?
1) Sell subsidiary
2) Do a spin-off
3) Equity carveout
What happens in a divestiture?
Sell assets, divisions, subsidiaries to another corporation or combo of corporations or individuals
What happens in a spinoff?
- Parent corporation distributes, on pro rata basis, all the shares it owns in subsidiary to its own S/Hs
- No money generally changes hands
- Non taxable event (as long as it jumps through substantial hoops)
What happens in an equity carveout?
- Also called partial IPO
- Parent co. sells a percentage of the equity of a subsidiary to the public stock market
- Receives cash for the percentage sold
- Can sell any percentage, often just less than 20%, just less than 50%, are chosen
Why is a nontaxable subsidiary sale not desirable?
-B/c gain duplicated when stock is sold later on
What is the consideration in a nontaxable subsidiary sale?
- Stock of Acquiring Co.
What is the character of the gain or loss in a taxable subsidiary asset sale?
- Depends on type of asset sold
What is the character of the gain or loss in a taxable subsidiary stock sale?
- Capital
The 338(h)(10) election decision must be made by whom?
- Both the buyer and the seller
If STOCKB = ASSETB, would the selling co. want to make a 338(h)(10) election? (Assuming Price = PriceNo338h10 = Price338h10)
- Seller indifferent to election
If STOCKB > ASSETB, would selling co. want to make a 338(h)(10) election? (Assuming Price = PriceNo338h10 = Price338h10)
- Seller’s after tax wealth maximized if FOREGO election
IF STOCKB < ASSETB, would selling co. want to make a 338(h)(10) election? (Assuming Price = PriceNo338h10 = Price338h10)
- Seller’s after tax wealth maximized if MAKE election
If purchase price = ASSETB, what is the Acquirer’s 338(h)(10) preference? (Assuming Price = PriceNo338h10 = Price338h10)
Indiferrent
If purchase price < ASSETB, what is the Acquirer’s 338(h)(10) preference? (Assuming Price = PriceNo338h10 = Price338h10)
Forego 338(h)(10)
If purchase price > ASSETB, what is the Acquirer’s 338(h)(10) preference? (Assuming Price = PriceNo338h10 = Price338h10)
Prefer 338(h)(10)
Why does ACQ_PRICE338h10 increase as the basis change amortization period decreased from 10years to 5years?
- Tax savings from basis step up recognized sooner with 5 year amortization period as opposed to 10 year amortization period
Under what conditions does a 338(h)(10) election make sense?
- If ASSETB > STOCK B
- And Price > ASSETB
- Then election mutually beneficial to both parties
