Your firm is interested in acquiring a high tech firm to expand its business. It is considering making the acquisition using cash, stock, or a combination of both. You have been tasked to make a recommendation on the type of acquisition that will result with the minimal tax impact. Analyze the pros and cons of cash, stock, and combined stock / cash acquisitions, and propose the method that minimizes taxes. Support your proposal with examples.© BrainMass Inc. brainmass.com December 24, 2021, 11:07 pm ad1c9bdddf
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This topic provided the opportunity to evaluate the pros and cons of various types of acquisitions. Acquisitions provide companies with a path to exponential growth and increased profits. Consideration should be given to structure considering an acquisition. Buyers and sellers must consider tax implications as well. The key to a successful acquisition is structuring a deal that is beneficial to the buyer and seller.
The structure type must be chosen carefully. Recognition of the different implications is critical in making a recommendation for a company on the type of acquisition.
A cash purchase involves a buyer acquiring the corporation's assets. A stock purchase involves a buyer acquiring the outstanding corporate stock from the seller. Both of these methods have benefits and drawbacks.
The benefit of a cash purchase is buyers will attempt to minimize potential contingent liabilities with an asset deal. In this scenario, the buyer indirectly assumes liability of the company being purchased. If someone takes legal action against the company after it is acquired, those assets are at risk.
Stock purchases are eligible for write-offs. If the stock is sold at a loss, this loss is for the most part, deductible if the buyer receives capital gains from other sources.
Another option to consider is a tax-free merger. These types of mergers occur when one company simply acquires a controlling interest in another company in exchange for at least 80% of its stock. This allows the acquiring company to form a subsidiary. The new entity purchases the acquired company's stock in exchange for the stock of the parent company. When this happens, the acquired company dissolves, allowing the assets and liabilities to become those of the newly formed company. This method is commonly used. It allows the former shareholders' tax basis in the stock they receive to be equal to the tax basis of the stock they relinquished. They don't report the taxable gain until the new stock is sold. This is helpful if the shareholders of the acquired company are not planning to cash their stock any time soon.
It is important to remember that if the stocks are cashed out, a tax liability is assumed.
Griffin, W., Lev, A. M., Malm, D., & D'Agostine, M. (2007, 09). Tax aspects of corporate mergers and acquisitions. Retrieved from http://www.davismalm.com/UploadedDocuments/Articles/GriffinLevTaxAspectsMergers AcquisitionsUpdated.pdf.© BrainMass Inc. brainmass.com December 24, 2021, 11:07 pm ad1c9bdddf>