Mergers, Acquisitions, and Corporate Restructurings

By Patrick A. Gaughan | Go to book overview

15
TAX ISSUES

Depending on the method used to finance the transaction, certain mergers, acquisitions, and restructuring may be tax-free. Some firms may use their tax benefits as assets in establishing the correct price that they might command in the marketplace. For this reason, tax considerations are important as both the motivation for a transaction and the valuation of a company. Part of the tax benefits from a transaction may derive from tax synergy, whereby one of the firms involved in a merger may not be able to fully utilize its tax shields. When combined with the merger partner, however, the tax shields may offset income. Some of these gains may come from unused net operating losses, which may be used by a more profitable merger partner. Tax reform, however, has limited the ability of firms to sell these net operating losses through mergers.

Other sources of tax benefits in mergers may arise from a market value of depreciable assets, which is greater than the value at which these assets are kept on the target’s books. The acquiring firm that is able to step up the basis of these assets in accordance with the purchase price may finally realize tax savings.

This chapter discusses the mechanics of realizing some of the tax benefits through mergers. It also reviews the research studies that attempt to determine the importance of tax effects as a motivating factor for mergers and leveraged buyouts (LBOs) and examines the different accounting treatments that may be applied to a merger or an acquisition. These methods, which are regulated by tax laws, affect the importance of taxes in the overall merger valuation. It will be seen that various reforms in tax laws have diminished the role that taxes play in mergers and acquisitions. However, taxes may still be an important consideration that both the seller and buyer must carefully weigh before completing a transaction.


FINANCIAL ACCOUNTING FOR M&As

Until 2001, there were two alternative accounting treatments for mergers and acquisitions: pooling and the purchase method. The main difference between them is the value that the combined firm’s balance sheet places on the assets of the acquired firm, as well as the depreciation allowances and charges against income following the merger. After much debate, however, the accounting profession eliminated pooling. All mergers must now be accounted for under the purchase method. In eliminating pooling, the United States came more into conformance with the accounting standards of most of the industrialized world.

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Mergers, Acquisitions, and Corporate Restructurings
Table of contents

Table of contents

  • Title Page iii
  • Contents v
  • Case Studies xi
  • Preface xv
  • 1 - Background 1
  • 1 - Introduction 3
  • 2 - History of Mergers 35
  • 3 - Legal Framework 74
  • 4 - Merger Strategy 125
  • 2 - Hostile Takeovers 181
  • 5 - Antitakeover Measures 183
  • 6 - Takeover Tactics 243
  • 3 - Going-Private Transactions and Leveraged Buyouts 291
  • 7 - Leveraged Buyouts 293
  • 8 - Topics in Going-Private Transactions 335
  • 9 - Employee Stock Ownership Plans 366
  • 4 - Corporate Restructuring 387
  • 10 - Corporate Restructuring 389
  • 11 - Restructuring in Bankruptcy 435
  • 12 - Corporate Governance 473
  • 13 - Joint Ventures and Strategic Alliances 523
  • 14 - Valuation 538
  • 15 - Tax Issues 607
  • Glossary 623
  • Index 631
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