2. Corporate Acquisitions, Mergers and Divisions13
Chapter
Corporate Acquisitions, Mergers and Divisions

3. Corporate Acquisitions
Asset acquisitions versus stock acquisitions
Taxable acquisitions versus tax deferred acquisitions

4. Asset Acquisitions All or some of the target’s assets can be purchased
Some, all, or none of target’s liabilities assumed
May be done indirectly through a merger
Acquiring corporation “absorbs” target, receiving all its assets and assuming all its liabilities

5. Asset Acquisition
$5 Million Cash
Carter
Primo
Operating Assets

6. Stock Acquisitions
Acquiring corporation purchases controlling interest in stock of target
Target operated as a subsidiary or liquidated

7. Stock Acquisition Carter Shareholders Merger Primo Carter
$4.8 Million Cash
Merger

8. Stock Acquisitions-Considerations
Advantages:
Target may have nontransferable rights, management in place and name recognition
Disadvantages:
Contingent liabilities
Minority shareholders

9. Taxable Versus Tax Deferred Acquisition
Refers to whether seller is taxable on gain
Tax deferred transactions generally result in a higher sales price since seller has no immediate tax liability
Tax deferred acquisitions often done with purchaser’s stock, a very tax efficient way to make a purchase

10. Acquisition Matrix Taxable asset Acquisitions
Taxable stock acquisitions
Tax deferred asset acquisitions
(A or C reorganizations)
Tax deferred stock acquisitions
(B reorganizations)

11. Other Considerations
Friendly acquisition can result in lowest overall tax and acquisition costs
Hostile acquisition can result in large professional and investment banking fees
Acquisition expenditures must generally be capitalized

12. Taxable Asset Purchases
Purchaser takes cost basis in assets
A lump-sum purchase price must be allocated to specific assets
Purchaser wants to allocate as much as possible inventory items and depreciable assets with short useful lives

13. Section 1060
Price allocation must be consistent between buyer and seller
Amount allocated to an asset can not exceed its fair market value
Any excess of purchase price over aggregate fair market value of operating assets allocated to goodwill
Goodwill is amortizable over 15 years

14. Taxable Asset Sales-Target
Target may stay in existence or liquidate
If corporation liquidated, shareholders must recognize gain or loss equal to difference between proceeds and their basis in their stock

15. Cash Mergers
Target corporation merges into acquiring corporation. Shareholders of target receive cash
Treated as taxable sale of assets by target corporation. Gain and loss recognized by target
Shareholders of target also recognize gain or loss

16. Cash Mergers
Yorgen
Lerner
Merger
Shareholder
$45 per share

17. Reverse Cash Merger
Acquiring corporation forms subsidiary. Subsidiary merged into target. Target shareholders receive cash
No tax at corporate level
Shareholders of target recognize gain or loss

18. Reverse Cash Merger Yorgen Shareholders Subco Lerner Merger
$45 per share
Merger

19. Purchase of Stock Acquirer takes cost basis in stock
No change in bases of assets to acquired corporation

20. Tax Deferred Asset Acquisitions
Acquiring issues stock to target shareholders.
Target’s assets and liabilities transferred to acquiring.
Target goes out of existence

21. Tax Deferred Asset Acquisition
Acquiring
Target
Assets and Liabilities
Shareholders
Acquirer Stock

22. Tax Deferred Assets Acquisitions-Effects
No gain or loss to target
No gain or loss to shareholders of target receiving acquiring corporation stock
Shareholder’s basis in target stock become his or her basis for acquiring corporation stock
Acquiring corporation’s bases in assets acquired from target is same as target’s bases in those same assets

23. Type A Reorganizations
Merger or consolidation
Must satisfy continuity of interest
To receive favorable ruling from IRS at least 50% of total consideration must be acquiring corporation stock
Gain but not loss recognized on any boot received up to gain realized

24. Forward Triangular Merger
Used as a way to avoid obtaining consent of acquiring corporation’s shareholders
Acquiring corporation forms new subsidiary and contributes stock to subsidiary.
Target merged into subsidiary.
Target shareholders are distributed acquiring corporation stock

25. Forward Triangular MergerMD
Misford
Dunstan
Dustan
Shareholders
Merger
80,000 Mistford Shares

26. Type C Reorganizations
Often referred to as a “practical merger”
Acquiring corporation buys substantially all of target’s corporations assets for acquiring corporation voting stock
Target corporation’s liabilities may be assumed
Target corporation must liquidate

27. Tax Deferred Stock Acquisitions
Shareholders of target corporation exchange their target stock for stock of acquiring corporation
Shareholders recognize no gain or loss
Shareholder’s basis for target corporation becomes basis of stock in acquiring corporation
Target corporation does not participate in or is affected by the transaction

28. Type B Reorganizations
Tax deferred stock acquisition
Acquiring corporation must use solely voting stock to acquire stock of target corporation
After transaction, acquiring corporation must own 80% of voting power of target corporation and 80% of each class of nonvoting stock

29. Continuity of business enterprise
Acquiring corporation must continue target corporation’s historic business or
Use a significant portion of target’s assets in a new business

30. Book/Tax Differences
Purchase method of accounting generally required under GAAP regardless of tax treatment
Target’s assets generally recorded at fair market value

31. Survival of Target Corporation’s Tax Attributes
Taxable asset acquisitions
Acquirer cannot purchase target’s tax attributes
Taxable stock acquisitions
Target’s tax attributes remain in tact
Tax deferred asset acquisition (A or C reorganization)
Acquirer succeeds to target’s tax attributes
Tax deferred stock acquisition
(B reorganization)
Target’s tax attributes are in tact

32. Net Operating Loss and Credit Carryovers
May only be used against post-acquisition income of acquirer
Use of acquired net operating loss carryovers and other favorable tax attributes subject to several limitations

33. Limitations on Use of Carryovers
Section 269 gives IRS power to disallow use of net operating loss or credit carryforwards if principal purpose of acquisition is evasion or avoidance of tax
Section 382 limits use of net operating loss carryforwards after a change in ownership

34. Section 382
Ownership change triggering statute can result from both taxable and tax deferred acquisitions
If an ownership change takes place, net operating loss carryforward that may be used in any one year is subject to the section 382 limitation

35. Section 382 Limitation
Represents largest amount of net operating loss that may be utilized in any one year
Equal to long term tax-exempt federal rate multiplied by value of target corporation immediately before the ownership change

36. Corporate Divisions
Three types:
Spin-off
Split off
Split up

37. Spin-off
Corporation distributes stock of a subsidiary proportionately to its shareholders
Shareholders own stock in both parent and subsidiary after the transaction

38. Spin-off Transaction
Shareholders
MacKeon
SouthMac

39. Spin-off Post Transaction
MacKeon
SouthMac
Shareholders

40. Split off
Corporation distributes stock in a subsidiary to a group of shareholders in exchange for their stock in the parent corporation
Exchanging shareholders have no ownership in parent after transaction

41. Split off Transaction - Before
MacBride
EastBride
200
Shareholders

42. Split off Transaction - After
MacBride
East Bride
165
Shareholders
35 Shareholders

43. Split Up Corporation owns one or more subsidiaries
Stock of subsidiaries distributed to shareholders who own subsidiaries directly

44. Split up Transaction - Before
Shareholders
MacPool
PoolSide
SunPool

45. Split up Transaction - After
Shareholders
PoofSide
SunPool

46. Tax Consequences of Corporate Division
Spin off
Dividend to shareholders
Split off
Redemption
Split up
Liquidation

47. Section 355 If provision applies no gain or loss to parent
No gain or loss to shareholders

48. Section 355 Requirements
Parent distributes stock representing at least 80% of subsidiary
After transaction, subsidiary engaged in an active business
After transaction, parent engaged in an active business

49. Section 355 Requirements
Both business conducted for five years before transaction
Not carried out as a device to distribute earnings and profits

50. Type D Reorganizations
Process where assets transferred to various old or newly created subsidiaries followed by distribution
Transaction must meet section 355