M&a: L/p Chapter 1: Introduction

Front 1

What is P/E financial engineering?

Back 1

Gaining better EPS by virtue of buyer having a higher P/E than seller

Front 2

Why do M&A?

Back 2

Economies of scale, time to market, combination of customer / supplier (vertical integration), product line diversification, defensive acquisitions, competitor take out, protect the core, new / better management, buy and build, acquisition of control premium.

Front 3

Merger acquisition structure

Back 3

Target is merged with buyer / buyer subsidiary formed for purpose of the merger. Target or buyer can survive after

Front 4

Stock purchase (public company structure) / tender vs exchange offer

Back 4

Tender offer: buyer makes public offer to target shareholders to buy shares

Exchange offer: buyer makes offer to target shareholders to buy shares in stock

Simplest form of acquisition: Buyer assumes all assets and liabilities, target becomes subsidiary of buyer, contracts remain intact.

Front 5

Merger structure

Back 5

Merger occurs when too many shareholders exist with private co or it is impractical to get everyone to sign PA.

Public co: more likely than stock purchase since it is not likely that all shareholders sign PA.

Alt two step acquisition: stock purchase majority of targets stock with tender or exchange offer, followed by squeeze-out merger approved by buyer as majorities shareholder - minority shareholders must take acquisition consideration.

Front 6

General tax implicafjons

Back 6

- acquisitions can be done on. Tax-free basis of a taxable basis.

- deferral is tax realized - “tax-free reorganization”: accomplished by acquiring most of the stock of a company. In these deals the asset portion is typically taxable.

- taxable transaction: the goal is cap gains treatment, not recognition of ordinary income at higher rates. If taxed, the amount over tax basis in shares / assets being sold is what is taxed.

- double tax can occur at corporate and shareholder level if not careful

Front 7

Step-up vs. Carryover basis

Back 7

Step up - stepping up value of depreciable assets over time enables greater depreciation deductions in the future to shelter income and reduce gain taxes. Good for buyer - asset sale. Taxable sale for seller.

Carryover - assets have same basis for buyer as they did for seller. Non-taxable for selller.

Front 8

Legal Stock vs Asset vs Merger tax implications (basic)

Back 8

Stock Purchase: target shareholders sell stock to buyer / target is not actually selling anything, so no double tax is incurred / tax adverse for buyer as carryover basis vs step up, unless 338 H10 where stock purchase is treated as asset for stock purposes

Mergers: can be taxable or tax free / stock or asset.

Asset: buyer buys assets from target / target pays tax on gain / if proceeds are distributed = double tax IFF liquidation vs. dividend distribution and Corp stays in bus., tax pay is by shareholders on dividend.

Front 9

Gen Corp law considerations

Back 9

- buyer will typically want to buy all of the stock of a company Vs having to deal with minority shareholders or subsidiary where any payment to parent must be split evenly between shareholders

- asset sale: buyer must get consents from target since comm. contracts require notice/novatipn. In a stock sale, this is not required because the contracting co. stays in place. Change or control provisions can make this murky

Reverse merger: subsidiary of buyer merges into target. Contracts stay in place.

Front 10

General Regulatory Considerations

Back 10

- need for regulatory approvals: affects timing, certainty, covenants, closing conditions

- very necessary in regulated industry where compliance is important

- Hart-Scott-Rodino Antitrust Improvements Act (HSR); $80MM+ target size or where parties exceed threshold of $160MM in sales/assets for one group and $16 for the other

Front 11

Basic Acquisition Accounting (Recapitalization Accounting)

Back 11

Post acquisition assets have a new book basis tied to FMV, and GW is not written off unless impaired