Question 1

In a purchase of assets,the buyer retains the target's tax attributes.

Accepted Answer

A) True 
 B)False

Question 2

According to Section 338 of the U.S.tax code,a purchaser of 80% or more of the assets of the target may elect to treat the acquisition as if it were an acquisition of the target's assets for tax purposes.

Accepted Answer

A) True 
 B)False

Question 3

Asset sales by the target firm just prior to the transaction may threaten the tax-free status of the deal.Moreover,tax-free deals are disallowed within ten-years of a spin-off.

Accepted Answer

A) True 
 B)False

Question 4

A section of the U.S.tax code known as 1031 forbids investors to make a "like kind" exchange of investment properties.

Accepted Answer

A) True 
 B)False

Question 5

In a tax-free reorganization,the buyer is never required to get shareholder approval.

Accepted Answer

A) True 
 B)False

Question 6

Under purchase accounting,the difference between the combined firm's shareholders' equity immediately following closing and the acquiring firm's shareholders' equity equals the purchase price paid for the target firm.

Accepted Answer

A) True 
 B)False

Question 7

In a statutory merger,the buyer retains the target's tax attributes.

Accepted Answer

A) True 
 B)False

Question 8

The IRS treats the reverse triangular cash merger as a purchase of target shares,with the target firm,including its assets,liabilities,and tax attributes,ceasing to exist.

Accepted Answer

A) True 
 B)False

Question 9

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
-Why do boards of directors of both acquiring and target companies often obtain so-called "fairness opinions" from outside investment advisors or accounting firms? What valuation methodologies might be employed in constructing these opinions? Should stockholders have confidence in such opinions? Why/why not?

Accepted Answer

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

Question 10

Which of the following are true?

Accepted Answer

A)  Taxes are important in any transaction. 
B)  Taxes should never be the overarching reason for the transaction. 
C)  Tax savings accruing to the buyer should simply reinforce the decision to acquire. 
D)  The sale of stock, rather than assets, is generally preferable to the target firm shareholders to avoid double taxation, if the target firm is structured as a C corporation. 
E)  All of the above.

Question 11

Case Study Short Essay Examination Questions
Consolidation in the Wireless Communications Industry:
Vodafone Acquires AirTouch
.
Deregulation of the telecommunications industry has resulted in increased consolidation. In Europe, rising competition is the catalyst driving mergers. In the United States, the break up of AT&T in the mid-1980s and the subsequent deregulation of the industry has led to key alliances, JVs, and mergers, which have created cellular powerhouses capable of providing nationwide coverage. Such coverage is being achieved by roaming agreements between carriers and acquisitions by other carriers. Although competition has been heightened as a result of deregulation, the telecommunications industry continues to be characterized by substantial barriers to entry. These include the requirement to obtain licenses and the need for an extensive network infrastructure. Wireless communications continue to grow largely at the expense of traditional landline services as cellular service pricing continues to decrease. Although the market is likely to continue to grow rapidly, success is expected to go to those with the financial muscle to satisfy increasingly sophisticated customer demands. What follows is a brief discussion of the motivations for the merger between Vodafone and AirTouch Communications. This discussion includes a description of the key elements of the deal structure that made the Vodafone offer more attractive than a competing offer from Bell Atlantic.
Vodafone
Company History
Vodafone is a wireless communications company based in the United Kingdom. The company is located in 13 countries in Europe, Africa, and Australia/New Zealand. Vodafone reaches more than 9.5 million subscribers. It has been the market leader in the United Kingdom since 1986 and as of 1998 had more than 5 million subscribers in the United Kingdom alone. The company has been very successful at marketing and selling prepaid services in Europe. Vodafone also is involved in a venture called Globalstar, LP, a limited partnership with Loral Space and Communications and Qualcomm, a phone manufacturer. "Globalstar will construct and operate a worldwide, satellite-based communications system offering global mobile voice, fax, and data communications in over 115 countries, covering over 85% of the world's population".
Strategic Intent
Vodafone's focus is on global expansion. They are expanding through partnerships and by purchasing licenses. Notably, Vodafone lacked a significant presence in the United States, the largest mobile phone market in the world. For Vodafone to be considered a truly global company, the firm needed a presence in the Unites States. Vodafone's strategy is focused on maintaining high growth levels in its markets and increasing profitability; maintaining their current customer base; accelerating innovation; and increasing their global presence through acquisitions, partnerships, or purchases of new licenses. Vodafone's current strategy calls for it to merge with a company with substantial market share in the United States and Asia, which would fill several holes in Vodafone's current geographic coverage.
Company Structure
The company is very decentralized. The responsibilities of the corporate headquarters in the United Kingdom lie in developing corporate strategic direction, compiling financial information, reporting and developing relationships with the various stock markets, and evaluating new expansion opportunities. The management of operations is left to the countries' management, assuming business plans and financial measures are being met. They have a relatively flat management structure. All of their employees are shareowners in the company. They have very low levels of employee turnover, and the workforce averages 33 years of age.
AirTouch
Company History
AirTouch Communications launched it first cellular service network in 1984 in Los Angeles during the opening ceremonies at the 1984 Olympics. The original company was run under the name PacTel Cellular, a subsidiary of Pacific Telesis. In 1994, PacTel Cellular spun off from Pacific Telesis and became AirTouch Communications, under the direction of Chair and Chief Executive Officer Sam Ginn. Ginn believed that the most exciting growth potential in telecommunications is in the wireless and not the landline services segment of the industry. In 1998, AirTouch operated in 13 countries on three continents, serving more than 12 million customers, as a worldwide carrier of cellular services, personal communication services (PCS), and paging services. AirTouch has chosen to compete on a global front through various partnerships and JVs. Recognizing the massive growth potential outside the United States, AirTouch began their global strategy immediately after the spin-off.
Strategic Intent
AirTouch has chosen to differentiate itself in its domestic regions based on the concept of "Superior Service Delivery." The company's focus is on being available to its customers 24 hours a day, 7 days a week and on delivering pricing options that meet the customer's needs. AirTouch allows customers to change pricing plans without penalty. The company also emphasizes call clarity and quality and extensive geographic coverage. The key challenges AirTouch faces on a global front is in reducing churn (i.e., the percentage of customers leaving), implementing improved digital technology, managing pressure on service pricing, and maintaining profit margins by focusing on cost reduction. Other challenges include creating a domestic national presence.
Company Structure
AirTouch is decentralized. Regions have been developed in the U.S. market and are run autonomously with respect to pricing decisions, marketing campaigns, and customer care operations. Each region is run as a profit center. Its European operations also are run independently from each other to be able to respond to the competitive issues unique to the specific countries. All employees are shareowners in the company, and the average age of the workforce is in the low to mid-30s. Both companies are comparable in terms of size and exhibit operating profit margins in the mid-to-high teens. AirTouch has substantially less leverage than Vodafone.
Merger Highlights
Vodafone began exploratory talks with AirTouch as early as 1996 on a variety of options ranging from partnerships to a merger. Merger talks continued informally until late 1998 when they were formally broken off. Bell Atlantic, interested in expanding its own mobile phone business's geographic coverage, immediately jumped into the void by proposing to AirTouch that together they form a new wireless company. In early 1999, Vodafone once again entered the fray, sparking a sharp takeover battle for AirTouch. Vodafone emerged victorious by mid-1999.
Motivation for the Merger
Shared Vision
The merger would create a more competitive, global wireless telecommunications company than either company could achieve separately. Moreover, both firms shared the same vision of the telecommunications industry. Mobile telecommunications is believed to be the among the fastest-growing segment of the telecommunications industry, and over time mobile voice will replace large amounts of telecommunications traffic carried by fixed-line networks and will serve as a major platform for voice and data communication. Both companies believe that mobile penetration will reach 50% in developed countries by 2003 and 55% and 65% in the United States and developed European countries, respectively, by 2005.
Complementary Assets
Scale, operating strength, and complementary assets were given as compelling reasons for the merger. The combination of AirTouch and Vodafone would create the largest mobile telecommunication company at the time, with significant presence in the United Kingdom, United States, continental Europe, and Asian Pacific region. The scale and scope of the operations is expected to make the combined firms the vendor of choice for business travelers and international corporations. Interests in operations in many countries will make Vodafone AirTouch more attractive as a partner for other international fixed and mobile telecommunications providers. The combined scale of the companies also is expected to enhance its ability to develop existing networks and to be in the forefront of providing technologically advanced products and services.
Synergy
Anticipated synergies include after-tax cost savings of $340 million annually by the fiscal year ending March 31, 2002. The estimated net present value of these synergies is $3.6 billion discounted at 9%. The cost savings arise from global purchasing and operating efficiencies, including volume discounts, lower leased line costs, more efficient voice and data networks, savings in development and purchase of third-generation mobile handsets, infrastructure, and software. Revenues should be enhanced through the provision of more international coverage and through the bundling of services for corporate customers that operate as multinational businesses and business travelers.
AirTouch's Board Analyzes Options
Morgan Stanley, AirTouch's investment banker, provided analyses of the current prices of the Vodafone and Bell Atlantic stocks, their historical trading ranges, and the anticipated trading prices of both companies' stock on completion of the merger and on redistribution of the stock to the general public. Both offers were structured so as to constitute essentially tax-free reorganizations. The Vodafone proposal would qualify as a Type A reorganization under the Internal Revenue Service Code; hence, it would be tax-free, except for the cash portion of the offer, for U.S. holders of AirTouch common and holders of preferred who converted their shares before the merger. The Bell Atlantic offer would qualify as a Type B tax-free reorganization. Table 1 highlights the primary characteristics of the form of payment (total consideration) of the two competing offers.  Morgan Stanley's primary conclusions were as follows:
1.Bell Atlantic had a current market value of $83 per share of AirTouch stock based on the $53.81 closing price of Bell Atlantic common stock on January 14, 1999.The collar would maintain the price at $80.08 per share if the price of Bell Atlantic stock during a specified period before closing were between $48 and $52 per share.
2.The Vodafone proposal had a current market value of $97 per share of AirTouch stock based on Vodafone's ordinary shares (i.e., common) on January 17, 1999.
3.Following the merger, the market value of the Vodafone American Depository Shares (ADSs) to be received by AirTouch shareholders under the Vodafone proposal could decrease.
"4.Following the merger, the market value of Bell Atlantic's stock also could decrease, particularly in light of the expectation that the proposed transaction would dilute Bell Atlantic's EPS by more than 10% through 2002.
In addition to Vodafone's higher value, the board tended to favor the Vodafone offer because it involved less regulatory uncertainty.As U.S.corporations, a merger between AirTouch and Bell Atlantic was likely to receive substantial scrutiny from the U.S.Justice Department, the Federal Trade Commission, and the FCC.Moreover, although both proposals could be completed tax-free, except for the small cash component of the Vodafone offer, the Vodafone offer was not subject to achieving any specific accounting treatment such as pooling of interests under U.S.generally accepted accounting principles (GAAP).
Recognizing their fiduciary responsibility to review all legitimate offers in a balanced manner, the AirTouch board also considered a number of factors that made the Vodafone proposal less attractive.The failure to do so would no doubt trigger shareholder lawsuits.The major factors that detracted from the Vodafone proposal were that it would not result in a national presence in the United States, the higher volatility of its stock, and the additional debt Vodafone would have to assume to pay the cash portion of the purchase price.Despite these concerns, the higher offer price from Vodafone won the day.
Acquisition Vehicle and Post Closing Organization
In the merger, AirTouch became a wholly owned subsidiary of Vodafone.Vodafone issued common shares valued at $52.4 billion based on the closing Vodafone ADS on April 20, 1999.In addition, Vodafone paid AirTouch shareholders $5.5 billion in cash.On completion of the merger, Vodafone changed its name to Vodafone AirTouch Public Limited Company.Vodafone created a wholly owned subsidiary, Appollo Merger Incorporated, as the acquisition vehicle.Using a reverse triangular merger, Appollo was merged into AirTouch.AirTouch constituted the surviving legal entity.AirTouch shareholders received Vodafone voting stock and cash for their AirTouch shares.Both the AirTouch and Appollo shares were canceled.After the merger, AirTouch shareholders owned slightly less than 50% of the equity of the new company, Vodafone AirTouch.By using the reverse merger to convey ownership of the AirTouch shares, Vodafone was able to ensure that all FCC licenses and AirTouch franchise rights were conveyed legally to Vodafone.However, Vodafone was unable to avoid seeking shareholder approval using this method.Vodafone ADS's traded on the New York Stock Exchange (NYSE).Because the amount of new shares being issued exceeded 20% of Vodafone's outstanding voting stock, the NYSE required that Vodafone solicit its shareholders for approval of the proposed merger.
Following this transaction, the highly aggressive Vodafone went on to consummate the largest merger in history in 2000 by combining with Germany's telecommunications powerhouse, Mannesmann, for $180 billion.Including assumed debt, the total purchase price paid by Vodafone AirTouch for Mannesmann soared to $198 billion.Vodafone AirTouch was well on its way to establishing itself as a global cellular phone powerhouse.
:"
-How valid are the reasons for the proposed merger?

Accepted Answer

The answer of Case Study Short Essay Examination Questions
Consolidation in...

Question 12

In a taxable purchase of target stock with cash,the target firm does not restate (i.e.,revalue)its assets and liabilities for tax purposes to reflect the amount that the acquirer paid for the shares of common stock.Rather,the tax basis (i.e.,their value on the target's financial statements)of assets and liabilities of the target before the acquisition carries over to the acquirer after the acquisition.

Accepted Answer

A) True 
 B)False

Question 13

The tax-free structure is generally not suitable for the acquisition of a division within a corporation..

Accepted Answer

A) True 
 B)False

Question 14

A transaction is usually taxable to the target firm's shareholders,if the acquirer's stock is used to purchase at least 30% of the target firm's stock or assets.

Accepted Answer

A) True 
 B)False

Question 15

The sale of stock,rather than assets,is generally preferable to the target firm shareholders to avoid double taxation,if the target firm is structured as a limited liability company.

Accepted Answer

A) True 
 B)False

Question 16

In a cash purchase of assets.the target's shareholders could be taxed twice,once when the firm pays taxes on any gains and a second time when the proceeds from the sale are paid to the shareholders either as a dividend or distribution following liquidation of the corporation.

Accepted Answer

A) True 
 B)False

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 is the form of payment? Why was it used?

Accepted Answer

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

Exam 12: Structuring the Deal: Tax and Accounting Considerations

In a purchase of assets,the buyer retains the target's tax attributes.

According to Section 338 of the U.S.tax code,a purchaser of 80% or more of the assets of the target may elect to treat the acquisition as if it were an acquisition of the target's assets for tax purposes.

Asset sales by the target firm just prior to the transaction may threaten the tax-free status of the deal.Moreover,tax-free deals are disallowed within ten-years of a spin-off.

A section of the U.S.tax code known as 1031 forbids investors to make a "like kind" exchange of investment properties.

In a tax-free reorganization,the buyer is never required to get shareholder approval.

Under purchase accounting,the difference between the combined firm's shareholders' equity immediately following closing and the acquiring firm's shareholders' equity equals the purchase price paid for the target firm.

In a statutory merger,the buyer retains the target's tax attributes.

The IRS treats the reverse triangular cash merger as a purchase of target shares,with the target firm,including its assets,liabilities,and tax attributes,ceasing to exist.

Which of the following are true?

The tax-free structure is generally not suitable for the acquisition of a division within a corporation..

A transaction is usually taxable to the target firm's shareholders,if the acquirer's stock is used to purchase at least 30% of the target firm's stock or assets.

The sale of stock,rather than assets,is generally preferable to the target firm shareholders to avoid double taxation,if the target firm is structured as a limited liability company.

In a cash purchase of assets.the target's shareholders could be taxed twice,once when the firm pays taxes on any gains and a second time when the proceeds from the sale are paid to the shareholders either as a dividend or distribution following liquidation of the corporation.