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11 Cards in this Set
- Front
- Back
What is P/E financial engineering? |
Gaining better EPS by virtue of buyer having a higher P/E than seller |
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Why do M&A? |
Economies of scale, time to market, combination of customer / supplier (vertical integration), product line diversification, defensive acquisitions, competitor take out, protect the core, new / better management, buy and build, acquisition of control premium. |
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Merger acquisition structure |
Target is merged with buyer / buyer subsidiary formed for purpose of the merger. Target or buyer can survive after |
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Stock purchase (public company structure) / tender vs exchange offer |
Tender offer: buyer makes public offer to target shareholders to buy shares Exchange offer: buyer makes offer to target shareholders to buy shares in stock Simplest form of acquisition: Buyer assumes all assets and liabilities, target becomes subsidiary of buyer, contracts remain intact. |
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Merger structure |
Merger occurs when too many shareholders exist with private co or it is impractical to get everyone to sign PA. Public co: more likely than stock purchase since it is not likely that all shareholders sign PA. Alt two step acquisition: stock purchase majority of targets stock with tender or exchange offer, followed by squeeze-out merger approved by buyer as majorities shareholder - minority shareholders must take acquisition consideration. |
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General tax implicafjons |
- acquisitions can be done on. Tax-free basis of a taxable basis. - deferral is tax realized - “tax-free reorganization”: accomplished by acquiring most of the stock of a company. In these deals the asset portion is typically taxable. - taxable transaction: the goal is cap gains treatment, not recognition of ordinary income at higher rates. If taxed, the amount over tax basis in shares / assets being sold is what is taxed.
- double tax can occur at corporate and shareholder level if not careful |
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Step-up vs. Carryover basis |
Step up - stepping up value of depreciable assets over time enables greater depreciation deductions in the future to shelter income and reduce gain taxes. Good for buyer - asset sale. Taxable sale for seller. Carryover - assets have same basis for buyer as they did for seller. Non-taxable for selller. |
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Legal Stock vs Asset vs Merger tax implications (basic) |
Stock Purchase: target shareholders sell stock to buyer / target is not actually selling anything, so no double tax is incurred / tax adverse for buyer as carryover basis vs step up, unless 338 H10 where stock purchase is treated as asset for stock purposes Mergers: can be taxable or tax free / stock or asset. Asset: buyer buys assets from target / target pays tax on gain / if proceeds are distributed = double tax IFF liquidation vs. dividend distribution and Corp stays in bus., tax pay is by shareholders on dividend. |
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Gen Corp law considerations |
- buyer will typically want to buy all of the stock of a company Vs having to deal with minority shareholders or subsidiary where any payment to parent must be split evenly between shareholders - asset sale: buyer must get consents from target since comm. contracts require notice/novatipn. In a stock sale, this is not required because the contracting co. stays in place. Change or control provisions can make this murky
Reverse merger: subsidiary of buyer merges into target. Contracts stay in place. |
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General Regulatory Considerations |
- need for regulatory approvals: affects timing, certainty, covenants, closing conditions - very necessary in regulated industry where compliance is important - Hart-Scott-Rodino Antitrust Improvements Act (HSR); $80MM+ target size or where parties exceed threshold of $160MM in sales/assets for one group and $16 for the other |
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Basic Acquisition Accounting (Recapitalization Accounting) |
Post acquisition assets have a new book basis tied to FMV, and GW is not written off unless impaired |