Question 1

For tax purposes,goodwill created after July 1993 may be amortized up to 15 years and is tax deductible.Goodwill booked before July 1993 is also tax deductible.

Accepted Answer

A) True 
 B)False

Question 2

Case Study Short Essay Examination Questions
Determining Deal Structuring Components
BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCo's business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCo's more highly structured and disciplined environment. Moreover, BigCo's decision making tends to be highly centralized.
While Upstart's stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions.
Upstart competes in an industry that is only tangentially related to BigCo's core business. Because BigCo's senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstart's industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstart's than those of BigCo. Both BigCo and HiTech are interested in preserving Upstart's highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstart's product lines not considered critical to New Horizon's long-term strategy immediately following closing.
New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizon's shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders' shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstart's outstanding shares.
:
-How would you characterize the post-closing organization? Why was this organizational structure used?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Determining Deal...

Question 3

Subchapter S Corporation shareholders,and LLC members,are taxed at their personal tax rates.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following are required for an acquisition to be considered tax-free?

Accepted Answer

A)  Continuity of interest 
B)  A legitimate business purpose other than tax avoidance 
C)  The use of predominately acquirer shares to buy the target's shares 
D)  An all cash acquisition of the target firm's shares 
E)  A, B, and C only

Question 5

Which of the following is not true of taxable asset purchases?

Accepted Answer

A)  Net operating losses carry over to the acquiring firm 
B)  The acquiring firm may step up its basis in the acquired assets. 
C)  The target firm is subject to recapture of tax credits and excess depreciation 
D)  Target firm shareholders' are subject to a potential immediate tax liability 
E)  Target firm net operating losses and tax credits cannot be transferred to the acquiring firm

Question 6

For financial reporting purposes,goodwill resulting from an acquisition

Accepted Answer

A)  Must equal the fair market value of the target firm's assets 
B)  Immediately impacts the acquirer's profits 
C)  Is expensed over 20 years 
D)  Is reviewed annually or whenever there is reason to believe it has lost value and amortized to the extent its value has declined 
E)  Never affects the profits of the acquirer

Question 7

Type A reorganizations are generally viewed as the least flexible of the various types of tax-free reorganizations.

Accepted Answer

A) True 
 B)False

Question 8

Since the IRS requires that target shareholders continue to hold a substantial equity interest in the acquiring company,the tax code defines what constitutes a substantial equity interest.

Accepted Answer

A) True 
 B)False

Question 9

A transaction generally will be considered non-taxable to the seller or target firm's shareholder if it involves the purchase of the target's stock or assets for substantially all cash,notes,or some other nonequity consideration.

Accepted Answer

A) True 
 B)False

Question 10

In a type B stock-for-stock reorganization,the acquirer must purchase an amount of voting stock that comprises at least 50% of the voting power of all of the target's voting stock outstanding.

Accepted Answer

A) True 
 B)False

Question 11

Nontaxable transactions also are called tax-free reorganizations.

Accepted Answer

A) True 
 B)False

Question 12

In a reverse triangular merger,the acquirer retains the target's tax attributes.

Accepted Answer

A) True 
 B)False

Question 13

Case Study Short Essay Examination Questions
Determining Deal Structuring Components
BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCo's business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCo's more highly structured and disciplined environment. Moreover, BigCo's decision making tends to be highly centralized.
While Upstart's stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions.
Upstart competes in an industry that is only tangentially related to BigCo's core business. Because BigCo's senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstart's industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstart's than those of BigCo. Both BigCo and HiTech are interested in preserving Upstart's highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstart's product lines not considered critical to New Horizon's long-term strategy immediately following closing.
New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizon's shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders' shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstart's outstanding shares.
:
-How would the use of purchase accounting affect the balance sheets of the combined companies?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Determining Deal...

Question 14

A forward triangular merger is the most commonly used form of reorganization for tax-free stock acquisitions in which the form of payment is acquirer stock.It involves three parties: the acquiring firm,the target firm,and a shell subsidiary of the target firm.

Accepted Answer

A) True 
 B)False

Question 15

As a result of a 338 election,the IRS treats the purchase of target shares as a taxable purchase of assets which can be stepped up to fair market value.Only the buyer has to agree to the 338 election.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is true about purchase accounting?

Accepted Answer

A)  Cash and accounts receivable, reduced for bad debt and returns, are valued at their values on the books of the target before the acquisition.. 
B)  Marketable securities are valued at their realizable value after transactions costs. 
C)  Property, plant and equipment are valued at fair market value. 
D)  Intangible assets are booked at their appraised values. 
E)  All of the above.

Question 17

Case Study Short Essay Examination Questions
Determining Deal Structuring Components
BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCo's business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCo's more highly structured and disciplined environment. Moreover, BigCo's decision making tends to be highly centralized.
While Upstart's stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions.
Upstart competes in an industry that is only tangentially related to BigCo's core business. Because BigCo's senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstart's industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstart's than those of BigCo. Both BigCo and HiTech are interested in preserving Upstart's highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstart's product lines not considered critical to New Horizon's long-term strategy immediately following closing.
New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizon's shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders' shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstart's outstanding shares.
:
-What was the form of acquisition? How does this form of acquisition protect the acquiring company's rights to HiTech's proprietary technology?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Determining Deal...

Question 18

Tax benefits that result from an acquisition should always be considered as among the most important justification for paying a very high premium for the target firm.

Accepted Answer

A) True 
 B)False

Question 19

It is seldom important that the buyer and seller agree on the allocation of the sales price among the assets being sold,since the allocation will determine the potential tax liability that would be incurred by the seller but that could by passed on to the buyer through to terms of the sales contract.

Accepted Answer

A) True 
 B)False

Question 20

Case Study Short Essay Examination Questions
Cablevision Uses Tax Benefits to Help Justify the Price Paid for Bresnan Communications
In mid-2010, Cablevision Systems announced that it had reached an agreement to buy privately owned Bresnan Communications for $1.37 billion in a cash for stock deal. CVS' motivation for the deal reflected the board's belief that the firm's shares were undervalued and their desire to expand coverage into the western United States.
CVS is the most profitable cable operator in the industry in terms of operating profit margins, due primarily to the firm's heavily concentrated customer base in the New York City area. Critics immediately expressed concern that the acquisition would provide few immediate cost savings and relied almost totally on increasing the amount of revenue generated by Bresnan's existing customers.
CVS saw an opportunity to gain market share from satellite TV operators providing services in BC's primary geographic market. Bresnan, the nation's 13th largest cable operator, serves Colorado, Montana, Wyoming, and Utah. CVS believes it can sell bundles of services, including Internet and phone services, to current Bresnan customers. Bresnan's primary competition comes from DirecTV and DISH Network, which cannot offer phone and Internet access services.
In order to gain shareholder support, CVS announced a $500 million share repurchase to placate shareholders seeking a return of cash. The deal was financed by a $1 billion nonrecourse loan and $370 in cash from Cablevision. CVS points out that the firm's direct investment in BC will be more than offset by tax benefits resulting from the structure of the deal in which both Cablevision and Bresnan agreed to treat the purchase of Bresnan's stock as an asset purchase for tax reporting purposes (i.e., a 338 election). Consequently, CVS will be able to write up the net acquired Bresnan assets to their fair market value and use the resulting additional depreciation to generate significant future tax savings. Such future tax savings are estimated by CVS to have a net present value of approximately $400 million
Discussion Question:
1.How is the 338 election likely to impact Cablevision System's earnings per share immediately following closing? Why?
2.As an analyst, how would you determine the impact of the anticipated tax benefits on the value of the firm?
3.What is the primary risk to realizing the full value of the anticipated tax benefits?
Case Study Short Essay Examination Questions
Teva Pharmaceuticals Buys Ivax Corporation
Teva Pharmaceutical Industries', a manufacturer and distributor of generic drugs, takeover of Ivax Corp for $7.4 billion created the world's largest manufacturer of generic drugs. For Teva, based in Israel, and Ivax, headquartered in Miami, the merger eliminated a large competitor and created a distribution chain that spans 50 countries.
To broaden the appeal of the proposed merger, Teva offered Ivax shareholders the option to receive for each of their shares either 0.8471 of American depository receipts (ADRs) representing Teva shares or $26 in cash. ADRs represent the receipt given to U.S. investors for the shares of a foreign-based corporation held in the vault of a U.S. bank. Ivax shareholders wanting immediate liquidity chose to exchange their shares for cash, while those wanting to participate in future appreciation of Teva stock exchanged their shares for Teva shares.
At closing, each outstanding share of Ivax common stock was cancelled. Each cancelled share represented the right to receive either of these two previously mentioned payment options. The merger agreement also provided for the acquisition of Ivax by Teva through a merger of Merger Sub, a newly formeS1U1P1dS1S1P0 and wholly-owned subsidiary of Teva, into Ivax. As the surviving corporation, Ivax would be a wholly-owned subsidiary of Teva. The merger involving the exchange of Teva ADRs for Ivax shares was considered as tax-free for those Ivax shareholders receiving Teva stock under U.S. law as it consisted of predominately acquirer shares.
Case Study. JDS Uniphase-SDL Merger Results in Huge Write-Off
What started out as the biggest technology merger in history up to that point saw its value plummet in line with the declining stock market, a weakening economy, and concerns about the cash-flow impact of actions the acquirer would have to take to gain regulatory approval. The $41 billion mega-merger, proposed on July 10, 2000, consisted of JDS Uniphase (JDSU) offering 3.8 shares of its stock for each share of SDL's outstanding stock. This constituted an approximate 43% premium over the price of SDL's stock on the announcement date. The challenge facing JDSU was to get Department of Justice (DoJ) approval of a merger that some feared would result in a supplier (i.e., JDS Uniphase-SDL) that could exercise enormous pricing power over the entire range of products from raw components to packaged products purchased by equipment manufacturers. The resulting regulatory review lengthened the period between the signing of the merger agreement between the two companies and the actual closing to more than 7 months. The risk to SDL shareholders of the lengthening of the time between the determination of value and the actual receipt of the JDSU shares at closing was that the JDSU shares could decline in price during this period.
Given the size of the premium, JDSU's management was unwilling to protect SDL's shareholders from this possibility by providing a "collar" within which the exchange ratio could fluctuate. The absence of a collar proved particularly devastating to SDL shareholders, which continued to hold JDSU stock well beyond the closing date. The deal that had been originally valued at $41 billion when first announced more than 7 months earlier had fallen to $13.5 billion on the day of closing.
JDSU manufactures and distributes fiber-optic components and modules to telecommunication and cable systems providers worldwide. The company is the dominant supplier in its market for fiber-optic components. In 1999, the firm focused on making only certain subsystems needed in fiber-optic networks, but a flurry of acquisitions has enabled the company to offer complementary products. JDSU's strategy is to package entire systems into a single integrated unit. This would reduce the number of vendors that fiber optic network firms must deal with when purchasing systems that produce the light that is transmitted over fiber. SDL's products, including pump lasers, support the transmission of data, voice, video, and internet information over fiber-optic networks by expanding their fiber-optic communications networks much more quickly and efficiently than would be possible using conventional electronic and optical technologies. SDL had approximately 1700 employees and reported sales of $72 million for the quarter ending March 31, 2000.
As of July 10, 2000, JDSU had a market value of $74 billion with 958 million shares outstanding. Annual 2000 revenues amounted to $1.43 billion. The firm had $800 million in cash and virtually no long-term debt. Including one-time merger-related charges, the firm recorded a loss of $905 million. With its price-to-earnings (excluding merger-related charges) ratio at a meteoric 440, the firm sought to use stock to acquire SDL, a strategy that it had used successfully in eleven previous acquisitions. JDSU believed that a merger with SDL would provide two major benefits. First, it would add a line of lasers to the JDSU product offering that strengthened signals beamed across fiber-optic networks. Second, it would bolster JDSU's capacity to package multiple components into a single product line.
Regulators expressed concern that the combined entities could control the market for a specific type of pump laser used in a wide range of optical equipment. SDL is one of the largest suppliers of this type of laser, and JDS is one of the largest suppliers of the chips used to build them. Other manufacturers of pump lasers, such as Nortel Networks, Lucent Technologies, and Corning, complained to regulators that they would have to buy some of the chips necessary to manufacture pump lasers from a supplier (i.e., JDSU), which in combination with SDL, also would be a competitor.
As required by the Hart-Scott-Rodino (HSR) Antitrust Improvements Act of 1976, JDSU had filed with the DoJ seeking regulatory approval. On August 24 th, the firm received a request for additional information from the DoJ, which extended the HSR waiting period. On February 6, JDSU agreed as part of a consent decree to sell a Swiss subsidiary, which manufactures pump laser chips, to Nortel Networks Corporation, a JDSU customer, to satisfy DoJ concerns about the proposed merger. The divestiture of this operation set up an alternative supplier of such chips, thereby alleviating concerns expressed by other manufacturers of pump lasers that they would have to buy such components from a competitor.
On July 9, 2000, the boards of both JDSU and SDL unanimously approved an agreement to merge SDL with a newly formed, wholly owned subsidiary of JDS Uniphase, K2 Acquisition, Inc. K2 Acquisition, Inc. was created by JDSU as the acquisition vehicle to complete the merger. In a reverse triangular merger, K2 Acquisition Inc. was merged into SDL, with SDL as the surviving entity. The post-closing organization consisted of SDL as a wholly owned subsidiary of JDS Uniphase. The form of payment consisted of exchanging JDSU common stock for SDL common shares. The share exchange ratio was 3.8 shares of JDSU stock for each SDL common share outstanding. Instead of a fraction of a share, each SDL stockholder received cash, without interest, equal to dollar value of the fractional share at the average of the closing prices for a share of JDSU common stock for the 5 trading days before the completion of the merger.
Under the rules of the NASDAQ National Market, on which JDSU's shares are traded, JDSU is required to seek stockholder approval for any issuance of common stock to acquire another firm. This requirement is triggered if the amount issued exceeds 20% of its issued and outstanding shares of common stock and of its voting power. In connection with the merger, both SDL and JDSU received fairness opinions from advisors employed by the firms.
The merger agreement specified that the merger could be consummated when all of the conditions stipulated in the agreement were either satisfied or waived by the parties to the agreement. Both JDSU and SDL were subject to certain closing conditions. Such conditions were specified in the September 7, 2000 S4 filing with the SEC by JDSU, which is required whenever a firm intends to issue securities to the public. The consummation of the merger was to be subject to approval by the shareholders of both companies, the approval of the regulatory authorities as specified under the HSR, and any other foreign antitrust law that applied. For both parties, representations and warranties (statements believed to be factual) must have been found to be accurate and both parties must have complied with all of the agreements and covenants (promises) in all material ways.
The following are just a few examples of the 18 closing conditions found in the merger agreement. The merger is structured so that JDSU and SDL's shareholders will not recognize a gain or loss for U.S. federal income tax purposes in the merger, except for taxes payable because of cash received by SDL shareholders for fractional shares. Both JDSU and SDL must receive opinions of tax counsel that the merger will qualify as a tax-free reorganization (tax structure). This also is stipulated as a closing condition. If the merger agreement is terminated as a result of an acquisition of SDL by another firm within 12 months of the termination, SDL may be required to pay JDSU a termination fee of $1 billion. Such a fee is intended to cover JDSU's expenses incurred as a result of the transaction and to discourage any third parties from making a bid for the target firm.
Despite dramatic cost-cutting efforts, the company reported a loss of $7.9 billion for the quarter ending June 31, 2001 and $50.6 billion for the 12 months ending June 31, 2001. This compares to the projected pro forma loss reported in the September 9, 2000 S4 filing of $12.1 billion. The actual loss was the largest annual loss ever reported by a U.S. firm up to that time. The fiscal year 2000 loss included a reduction in the value of goodwill carried on the balance sheet of $38.7 billion to reflect the declining market value of net assets acquired during a series of previous transactions. Most of this reduction was related to goodwill arising from the merger of JDS FITEL and Uniphase and the subsequent acquisitions of SDL, E-TEK, and OCLI..
The stock continued to tumble in line with the declining fortunes of the telecommunications industry such that it was trading as low as $7.5 per share by mid-2001, about 6% of its value the day the merger with SDL was announced. Thus, the JDS Uniphase-SDL merger was marked by two firsts-the largest purchase price paid for a pure technology company and the largest write-off (at that time) in history. Both of these infamous "firsts" occurred within 12 months.
Case Study Discussion Questions
-What are the primary differences between a forward and a reverse triangular merger? Why might JDS Uniphase have chosen to merge its K2 Acquisition Inc.subsidiary with SDL in a reverse triangular merger? Explain your answer.

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Cablevision Uses...

Exam 12: Structuring the Deal: Tax and Accounting Considerations

For tax purposes,goodwill created after July 1993 may be amortized up to 15 years and is tax deductible.Goodwill booked before July 1993 is also tax deductible.

Subchapter S Corporation shareholders,and LLC members,are taxed at their personal tax rates.

Which of the following are required for an acquisition to be considered tax-free?

Which of the following is not true of taxable asset purchases?

For financial reporting purposes,goodwill resulting from an acquisition

Type A reorganizations are generally viewed as the least flexible of the various types of tax-free reorganizations.

Since the IRS requires that target shareholders continue to hold a substantial equity interest in the acquiring company,the tax code defines what constitutes a substantial equity interest.

A transaction generally will be considered non-taxable to the seller or target firm's shareholder if it involves the purchase of the target's stock or assets for substantially all cash,notes,or some other nonequity consideration.

In a type B stock-for-stock reorganization,the acquirer must purchase an amount of voting stock that comprises at least 50% of the voting power of all of the target's voting stock outstanding.

Nontaxable transactions also are called tax-free reorganizations.

In a reverse triangular merger,the acquirer retains the target's tax attributes.

A forward triangular merger is the most commonly used form of reorganization for tax-free stock acquisitions in which the form of payment is acquirer stock.It involves three parties: the acquiring firm,the target firm,and a shell subsidiary of the target firm.

As a result of a 338 election,the IRS treats the purchase of target shares as a taxable purchase of assets which can be stepped up to fair market value.Only the buyer has to agree to the 338 election.

Which of the following is true about purchase accounting?

Tax benefits that result from an acquisition should always be considered as among the most important justification for paying a very high premium for the target firm.