Deck 12: Structuring the Deal:

Question 1

Would you characterize this as a reverse or forward merger? Based on your answer why was this type of reorganization selected by SoftBank? Will this takeover require a vote by Softbank shareholders?

Answer 1

This is a reverse merger in which the merger sub is merged into Sprint-Nextel with Sprint surviving. The purpose of this reorganization is to avoid requiring a SoftBank shareholder approval, to keep Sprint intact to allow its vendor and customer contracts to transfer to SoftBank unless consent to assignment is stipulated in the contract. The portion of the form of payment consisting of New Sprint stock for Sprint-Nextel stock is tax free to Sprint - Nextel shareholders.

Question 2

did SoftBank use New Sprint shares as part of the tender offer to Sprint shareholders rather than its own shares?

Answer 2

While SoftBank's shares do not currently trade on U.S. stock exchanges, they could have been registered as ADSs. However, SoftBank is not a well-known firm in the U.S. and its shares might have been less acceptable to Sprint shareholders and may have traded at a discount from their true value. Consequently, it made more sense to use New Sprint shares.

Question 3

convertible debt is described as a "stock lockup." How does the convertible debt discourage other interested parties from bidding on Sprint?

Answer 3

The convertible debt enables SoftBank to acquire 16.2% of Sprint's stock even if the merger is not completed at $5.25 per share, well below the firm's $7.25 price trading on public exchanges. Any new acquirer would have a potential competitor as a sizeable shareholder.

Question 4

4 What is goodwill and how is it created?

Question 5

Archer Daniel Midland (ADM) wants to acquire AgriCorp to augment its ethanol manufacturing capability. AgriCorp wants
the transaction to be tax-free for its shareholders. ADM wants to preserve AgriCorp's significant investment tax credits and tax loss carryforwards so that they transfer in the transaction. Also, ADM plans on selling certain unwanted AgriCorp assets to help finance the transaction. How would you structure the deal so that both parties' objectives could be achieved?

Question 6

6 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?

Question 7

are the arguments for and against the proposed takeover being approved by U.S. regulators?

Question 8

are some of the important tax-related issues the boards of the acquirer and target companies may need to address prior to
entering negotiations? How might the resolution of these issues impact the form of payment and form of acquisition?

Question 9

1 When does the IRS consider a transaction to be non-taxable to the target firm's shareholders? What is the justification for the
IRS' position?

Question 10

3 Under what circumstances can the assets of the acquired firm be increased to fair market value when the transaction is deemed a taxable purchase of stock?

Question 11

is the form of payment and form of acquisition employed by SoftBank in its takeover of Sprint-Nextel? Is all or some of the total consideration paid to Sprint shareholders tax free?

Question 12

Tangible assets are often increased to fair market value following a transaction and depreciated faster than their economic lives.
What is the potential impact on post-transaction EPS, cash flow, and balance sheet?

Question 13

Taxes are an important consideration in almost any transaction, and they are often the primary motivation for an acquisition.

Question 14

12 Acquiring Company buys 100% of Target Company's equity for $5,000,000 in cash. As an analyst, you are given the
following pre-merger balance sheets for the two companies. Assuming plant and equipment is revalued upward by $500,000,
what will be the combined companies' shareholders' equity plus total liabilities? What is the difference between Acquiring
Company's shareholders' equity and the shareholders' equity of the combined companies? Show your work.

Question 15

11 Target Company has incurred $5,000,000 in losses during the past 3 years; Acquiring Company anticipates pre-tax earnings of
$3,000,000 in each of the next 3 years. What is the difference between total taxes that would have been paid before the merger compared to actual taxes paid by the Acquiring Company after the merger assuming a marginal tax rate of 40 percent? Show your work.

Question 16

is the purpose of the holding company structure adopted by SoftBank in this transaction?

Question 17

is the purpose of the reverse termination and termination fees employed in the transaction?

Question 18

Discuss how the form of acquisition (i.e., asset purchase or stock deal) could impact the net present value or internal rate of
return of the deal calculated post-closing.

Question 19

Under what circumstances might an asset become impaired? How might this event affect the way in which acquirers bid for
target firms?

Question 20

2 What are the advantages and disadvantages of a tax-free transaction for the buyer? Be specific.

Question 21

Under purchase price accounting, the excess of the purchase price paid over the book value of equity of the target firm is assigned only to the tangible assets up to their fair market value or to goodwill.

Question 22

Tax free reorganizations generally require that all or substantially all of the target company's assets or shares be acquired in order to ensure that the acquiring firm has a continuing ownership interest in the combined firms.

Question 23

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.

Question 24

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.

Question 25

major advantages of using a triangular structure are limitations of the voting rights of acquiring shareholders and that the acquirer gains control of the target through a subsidiary without being directly responsible for the target's known and unknown liabilities.

Question 26

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.

Question 27

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.

Question 28

Empirical studies generally show that the tax shelter resulting from the ability of the acquiring firm to increase the value of acquired assets to their FMV is a highly important motivating factor for a takeover.

Question 29

form of payment does not affect whether a transaction is taxable to the seller's shareholders.

Question 30

the viewpoint of the seller or target company shareholder, transactions may be tax-free or entirely or partially taxable.

Question 31

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.

Question 32

As a general rule, a transaction is taxable to the target company shareholders if they receive the acquiring firm's stock and non-taxable if they receive cash.

Question 33

is seldom important that the buyer and seller agree on the allocation of the sales price among the assets being sold, since the allocation will determine the potential tax liability that would be incurred by the seller but that could by passed on to the buyer through to terms of the sales contract.

Question 34

Taxable transactions usually involve the purchase of the target's voting stock, because the purchase of assets automatically will trigger a taxable gain for the target if the fair market value of the acquired assets exceeds the target firm's tax basis in the assets.

Question 35

transaction generally will be considered non-taxable to the seller or target firm's shareholder if it involves the purchase of the target's stock or assets for substantially all cash, notes, or some other nonequity consideration.

Question 36

If a transaction involves a cash purchase of target stock, the target company's tax cost or basis in the acquired stock or assets is increased or "stepped up" automatically to their fair market value (FMV), which is equal to the purchase price paid by the acquirer.

Question 37

Purchase accounting affects only the cash flow of the combined firms but not the reported net income.

Question 38

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.

Question 39

The IRS generally views forward triangular cash mergers as a purchase of target stock followed by a liquidation of the target for which target shareholders will recognize a taxable gain or loss as if they had sold their shares.

Question 40

a triangular cash merger, the target firm may either be merged into an acquirer's operating or shell acquisition subsidiary with the subsidiary surviving or the acquirer's subsidiary is merged into the target firm with the target surviving.

Question 41

To demonstrate continuity of interests (COI), target shareholders must continue to own a substantial part of the value of the combined target and acquiring firms.

Question 42

If the transaction is tax-free, the acquiring company is able to transfer or carry over the target's tax basis to its own financial statements.

Question 43

Nontaxable transactions also are called tax-free reorganizations.

Question 44

A buyer may divest a significant portion of the acquired company immediately following closing without jeopardizing the tax-free status of the transaction.

Question 45

If the acquirer invokes a 338 election no taxes will have to be paid on any gains on assets written up to their fair market value.

Question 46

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

Question 47

Tax-free reorganizations generally require that all or substantially all of the target company's assets or shares be acquired.

Question 48

Transactions may be partially taxable if the target shareholders receive some nonequity consideration, such as cash or debt, in addition to the acquirer's stock.

Question 49

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.

Question 50

Tax-free reorganizations require that substantially all of the consideration received by the target's shareholders be paid in common or preferred stock.

Question 51

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

Question 52

Acquirers and targets planning to enter into a tax-free transaction seldom seek to get an advance ruling from the IRS to determine its tax-free status.

Question 53

As a result of a 338 election, the IRS treats the purchase of target shares as a taxable purchase of assets which can be stepped up to fair market value. Only the buyer has to agree to the 338 election.

Question 54

Tax benefits that result from an acquisition should always be considered as among the most important justification for paying a very high premium for the target firm.

Question 55

Tax-free reorganizations require that substantially all of the consideration received by the target's shareholders be paid in cash.

Question 56

With the purchase of target stock, the acquirer retains the target's tax attributes, but there is no step up in the basis of the acquired assets unless the acquirer adopts a 338 election.

Question 57

In a reverse triangular merger, the acquirer retains the target's tax attributes.

Question 58

In a forward triangular merger, the target firm's tax attributes in the form of any tax loss carry forwards or carrybacks or investment tax credits carry over to the acquirer because the target ceases to exist.

Question 59

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

Question 60

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

Question 61

Type A reorganizations are generally viewed as the least flexible of the various types of tax-free reorganizations.

Question 62

The Type C reorganization is used when it is essential for the acquirer not to assume any undisclosed liabilities.

Question 63

To qualify for a Type A reorganization, the transaction must be either a merger or a consolidation.

Question 64

The sale of assets by a target firm will result in a taxable gain if the fair market value is less than the book value?

Question 65

The disadvantages of the forward triangular merger may include the requirement of the buyer to get shareholder approval.

Question 66

To qualify for a 1031 exchange, the property must be an investment property or one that is used in a trade or business (e.g., a warehouse, store, or commercial office building).

Question 67

A type C reorganization is a stock-for-assets reorganization with the requirement that at least 50% of the FMV of the target's assets, as well as the assumption of certain specified liabilities, are acquired solely in exchange for voting stock.

Question 68

Goodwill no longer has to be amortized over its projected life, but it must be written off if it is deemed to have been impaired. Impairment reviews are to be taken annually or whenever the firm has experienced an event which materially affects the value of its assets.

Question 69

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.

Question 70

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

Question 71

So-called Morris Trust transactions tax code rules restrict how certain types of corporate deals can be structured to avoid taxes.

Question 72

Although NOLs represent a potential source of value, their use must be monitored carefully to realize the full value resulting from the potential for deferring income taxes.

Question 73

For tax purposes, goodwill created after July 1993 may be amortized up to 15 years and is tax deductible. Goodwill booked before July 1993 is also tax deductible.

Question 74

Since the IRS requires that target shareholders continue to hold a substantial equity interest in the acquiring company, the tax code defines what constitutes a substantial equity interest.

Question 75

Triangular mergers are rarely used for tax-free transactions.

Question 76

A forward triangular merger is the most commonly used form of reorganization for tax-free stock acquisitions in which the form of payment is acquirer stock. It involves three parties: the acquiring firm, the target firm, and a shell subsidiary of the target firm.

Question 77

The acquirer must be careful that not too large a proportion of the purchase price be composed of cash, because this might not meet the IRS's requirement for continuity of interests of the target shareholders and disqualify the transaction as a Type A reorganization.

Question 78

Subchapter S Corporation shareholders, and LLC members, are taxed at their personal tax rates.

Question 79

Which of the following is not true about mergers and acquisitions and taxes?

A) Tax considerations and strategies are likely to have an important impact on how a deal is structured by affecting the amount, timing, and composition of the price offered to a target firm.
B) None of the above
B) Tax factors are likely to affect how the combined firms are organized following closing, as the tax ramifications of a corporate structure are quite different from those of a limited liability company or partnership.
C) Potential tax savings are often the primary motivation for an acquisition or merger.
D) Transactions may be either partly or entirely taxable to the target firm's shareholders or tax-free.

Question 80

In a type B stock-for-stock reorganization, the acquirer must purchase an amount of voting stock that comprises at least 50% of the voting power of all of the target's voting stock outstanding.