Asset versus Stock Acquisitions

1
Asset versus Stock Acquisitions

• Nontax issues
• Known and potential liabilities of target
  corporation
• Rights and benefits associated with targets
  legal entity
• Negotiation with target management vs. target
  shareholders

2
Taxable Asset Acquisitions

• Two options
• Direct asset purchase without liquidation of
  target
• Direct asset purchase with liquidation of target
  or merger
• Recall tax consequences
• Target recognizes gain/loss on sale of assets
• If acquisition is a merger or target liquidates,
  target shareholders recognize gain/loss on
  disposition of their target stock
• Acquiring corporation takes a tax basis in
  targets assets equal to their purchase price

3
Taxable Stock Acquisitions

• Tax consequences without Sec. 338 election
• Target recognizes no gain/loss
• Tax basis of target assets is not affected (no
  step-up or step-down to FMV)
• Target shareholders recognize gain/loss on
  disposition of their target stock
• Acquiring corporation takes a tax basis in target
  stock equal to purchase price

4
Taxable Stock Acquisitions continued

• Tax consequences with Sec. 338 election
• Target recognizes gain/loss as though its assets
  were sold for aggregate deemed sale price
• Tax basis of target assets is stepped-up or down
  to aggregate deemed sale price
• Aggregate deemed sale price price paid for
  stock targets liabilities assumed tax on
  basis step-up or step-down
• Target shareholders recognize gain/loss on
  disposition of their stock
• Acquiring corporation takes a tax basis in target
  stock equal to purchase price

5
Example Taxable Acquisition Alternatives

• Acquiring corporation (A) wishes to purchase the
  assets of target corporation (T) for 500,000
  cash or will pay a price for the stock of T that
  provides equivalent value to Ts shareholders
• Ts assets have a tax basis of 100,000
• Ts shareholders have 150,000 of tax basis in
  their T stock and have owned it longer than 1
  year
• T has no liabilities and no NOL, capital loss, or
  tax credit carryforwards

6
Example continued

• What are the tax consequences of the acquisition
  to T, A, and Ts shareholders under the 4 taxable
  acquisition alternatives?
• Suppose that T owns the following assets
• Inventory with a tax basis of 50,000 and a FMV
  of 120,000
• Personal property with a tax basis of 50,000 and
  a FMV of 80,000 (MACRS life of 5 years)
• What future tax benefits would A receive by
  stepping up the basis of Ts assets?

7
Example continued

• Suppose that the future tax benefits of the step
  up are worth 95,000
• Which acquisition alternative would A prefer?
  Why?
• Would As preferences change if T had expiring
  capital loss carry forwards of 150,000? What
  are the tax consequences of each alternative to
  A, T, and Ts shareholders in this case?

8
Example continued

• Refer back to the original scenario, with no
  capital loss carry forward. At what price for an
  asset purchase is A indifferent between an asset
  purchase and a stock purchase without a Sec. 338
  election?
• At this price, which option do Ts shareholders
  prefer?

9
Strategic Issues

• Determination of final price is the result of
  negotiations that often split tax costs and
  benefits
• Acquirer should consider tax consequences of
  alternative transaction forms to the seller in
  determining a competitive offer
• Choice is often between taxable and nontaxable
  forms as well as between asset and stock
  acquisitions

10
Practical Issues

• How would the acquirer estimate the tax basis of
  a potential targets assets, and its other tax
  attributes, to determine whether an asset or
  stock purchase is desirable and determine a
  competitive price?
• How would the acquirer determine the tax status
  of the targets shareholders?
• How would the future tax benefits of a basis step
  up be determined?