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    22 BIWS Acquisition Types

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    Sanjay Rathi
    This document summarizes the key differences between a stock purchase acquisition, asset purchase acquisition, and 338(h)(10) election. In a stock purchase, the buyer acquires all assets and liabilities, while in an asset purchase the buyer can select which assets and liabilities to acquire. A 338(h)(10) election allows a stock purchase to be treated as an asset purchase for tax purposes. The document also discusses how each transaction type affects the valuation and tax treatment of assets, liabilities, goodwill, and net operating losses. While the tax implications may seem complex, the document notes they generally do not significantly impact merger models unless an unusual situation exists.

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    22 BIWS Acquisition Types

    Uploaded by

    Sanjay Rathi
    459 views3 pages
    This document summarizes the key differences between a stock purchase acquisition, asset purchase acquisition, and 338(h)(10) election. In a stock purchase, the buyer acquires all assets and liabilities, while in an asset purchase the buyer can select which assets and liabilities to acquire. A 338(h)(10) election allows a stock purchase to be treated as an asset purchase for tax purposes. The document also discusses how each transaction type affects the valuation and tax treatment of assets, liabilities, goodwill, and net operating losses. While the tax implications may seem complex, the document notes they generally do not significantly impact merger models unless an unusual situation exists.

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    Acquisition types

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    This document summarizes the key differences between a stock purchase acquisition, asset purchase acquisition, and 338(h)(10) election. In a stock purchase, the buyer acquires all assets and liabilities, while in an asset purchase the buyer can select which assets and liabilities to acquire. A 338(h)(10) election allows a stock purchase to be treated as an asset purchase for tax purposes. The document also discusses how each transaction type affects the valuation and tax treatment of assets, liabilities, goodwill, and net operating losses. While the tax implications may seem complex, the document notes they generally do not significantly impact merger models unless an unusual situation exists.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    459 views3 pages

    22 BIWS Acquisition Types

    Uploaded by

    Sanjay Rathi
    This document summarizes the key differences between a stock purchase acquisition, asset purchase acquisition, and 338(h)(10) election. In a stock purchase, the buyer acquires all assets and liabilities, while in an asset purchase the buyer can select which assets and liabilities to acquire. A 338(h)(10) election allows a stock purchase to be treated as an asset purchase for tax purposes. The document also discusses how each transaction type affects the valuation and tax treatment of assets, liabilities, goodwill, and net operating losses. While the tax implications may seem complex, the document notes they generally do not significantly impact merger models unless an unusual situation exists.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3

    Types of Acquisitions Quick Reference

    Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election


    http://breakingintowallstreet.com

    In a stock purchase the buyer acquires the sellers stock from shareholders, all assets and liabilities,
    and off-balance sheet items as well. In an asset purchase the buyer can pick and choose which assets
    it wants to acquire and which liabilities it wants to assume. Unless its stated explicitly in the
    purchase agreement, the buyer doesnt get it.
    In addition to both of those, theres also a Section 338(h)(10) Election, which allows a stock purchase
    to be treated like an asset purchase for accounting purposes.

    Sellers:
    Assets &
    Liabilities:
    Valuation
    of Assets &
    Liabilities:
    Seller
    Taxes:

    Stock Purchase
    Shareholders
    Buyer gets everything

    Asset Purchase
    Corporate Entity
    Buyer picks and chooses

    Book values used, but


    modified for any step-ups
    or step-downs
    Single Taxation
    Shareholders pay capital
    gains tax

    Every single asset/liability


    must be valued separately

    Book Basis:

    Assets/liabilities stepped
    up or down for accounting
    purposes
    Tax Basis:
    Buyer assumes sellers tax
    basis for assets/liabilities
    Goodwill & Not amortized for tax
    Other
    purposes and not taxIntangibles: deductible
    Seller
    Buyer can apply Section
    NOLs:
    382 post-transaction to
    reduce taxes
    Complexity: Inexpensive and quick to
    execute
    Used For:

    Most public/large
    companies

    Preferred
    By:

    Sellers

    338(h)(10) Election
    Shareholders
    Buyer gets everything

    Book values used, but


    modified for any step-ups
    or step-downs
    Double Taxation taxes on Double Taxation taxes on
    Purchase Price Minus Fair
    Purchase Price Minus Fair
    Market Value as well as on Market Value as well as on
    shareholder proceeds
    shareholder proceeds
    Assets/liabilities stepped
    Assets/liabilities stepped
    up or down for accounting up or down for accounting
    purposes
    purposes
    Buyer receives tax step-up Buyer receives tax step-up
    for assets/liabilities
    for assets/liabilities
    Amortization is taxAmortization is taxdeductible; amortized over deductible; amortized over
    15 years for tax purposes
    15 years for tax purposes
    Completely lost in
    Completely lost in
    transaction
    transaction
    Complex and timeconsuming need to value
    and transfer each asset
    Divestitures; distressed
    sales; some private
    companies
    Buyers

    Inexpensive and quick to


    execute
    Private companies;
    compromise between
    buyer and seller
    Both

    Types of Acquisitions Quick Reference


    Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election
    http://breakingintowallstreet.com

    Ok, so how does all of this actually affect our merger model?

    Combined
    Balance
    Sheet:

    Goodwill
    Created:

    Goodwill
    Treatment:

    Stock Purchase
    Add all sellers assets and
    liabilities (assume
    shareholders equity is
    wiped out); adjust for
    write-ups and writedowns and new items
    =Equity Purchase Price
    Seller Book Value + Seller
    Existing Goodwill PP&E
    Write-Up Intangibles
    Write-Up Seller Existing
    DTL + Write-Down of
    Sellers Existing DTA +
    New DTL Created
    Not amortized for
    accounting purposes; not
    amortized for tax purposes
    and not tax-deductible

    Asset Purchase
    Only add the sellers assets
    and liabilities that the
    buyer is acquiring; adjust
    for write-ups and writedowns and new items
    created in acquisition
    =Equity Purchase Price
    Seller Book Value + Seller
    Existing Goodwill PP&E
    Write-Up Intangibles
    Write-Up Seller Existing
    DTL + Write-Down of
    Sellers Existing DTA

    Not amortized for


    accounting purposes;
    amortized over 15 years
    for taxes and taxdeductible
    Intangibles
    Amortized for accounting
    Amortized for accounting
    Treatment:
    purposes; not taxpurposes; tax-amortized
    over 15 years and taxdeductible
    deductible
    Depreciation Affects Pre-Tax Income but Affects Pre-Tax Income
    from PP&E
    not tax-deductible
    and tax-deductible
    Write-Up:
    New DTL
    Total Asset Write-Up *
    $0
    Created:
    Buyer Tax Rate
    Annual
    Sellers Equity Purchase
    $0
    NOL Usage
    Price * MAX(Previous 3
    Allowed:
    Months Adjusted LongTerm Rates)
    DTA Write- =MAX(0, NOL Balance
    Subtract entire NOL
    Down:
    Allowed Annual Usage *
    balance from DTA
    Years Until Expiration)

    338(h)(10) Election
    Add all sellers assets and
    liabilities (assume
    shareholders equity is
    wiped out); adjust for
    write-ups and writedowns and new items
    =Equity Purchase Price
    Seller Book Value + Seller
    Existing Goodwill PP&E
    Write-Up Intangibles
    Write-Up Seller Existing
    DTL + Write-Down of
    Sellers Existing DTA
    Not amortized for
    accounting purposes;
    amortized over 15 years
    for taxes and taxdeductible
    Amortized for accounting
    purposes; tax-amortized
    over 15 years and taxdeductible
    Affects Pre-Tax Income
    and tax-deductible
    $0
    $0

    Subtract entire NOL


    balance from DTA

    Types of Acquisitions Quick Reference


    Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election
    http://breakingintowallstreet.com

    Whats the net impact of all these tax items on our merger model?
    Surprisingly, they dont do that much. You calculate the book income tax expense what the
    company should owe in taxes based on its pre-tax income and tax rate and then calculate the cash
    income tax expense what they actually pay based on their NOL usage, and how intangibles,
    goodwill, and depreciation are deducted or not deducted for tax purposes.
    If the combined company owes more in cash taxes than it does in book taxes, we record that by
    decreasing the deferred income tax liability (DTL) on its balance sheet; if it owes less in cash taxes
    than it does in book taxes, we increase its deferred income tax liability (DTL).
    Some of these tax details may seem confusing, and thats because they are. It takes some time to get
    used to all the rules.
    However, keep in mind that in most cases all these tax details dont impact the merger model
    output very much unless we have a really unusual situation.

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