Acquisitions can have important tax consequences depending on
(a) Whether the acquiring firm purchases the target’s stock or just its assets,
(b) Whether cash or stock is used for the payment, and
(c) How the acquirer records the target’s assets on its books after the merger. Suppose a target’s assets have a value of $50 million, but the appraised value of those assets is $80 million. The target firm is in the 20% tax bracket. Here are four possible situations:
(1) Acquirer pays $100 million in cash for the target’s stock in a tender offer and records assets at their book value.
(2) Same as in part (1) but acquirer records assets at their appraised value.
(3) Acquirer pays $100 million worth of stuck in exchange for the target’s stock.
(4) Acquirer pays $100 million in cash to the target for its assets.
In each situation, answer the following questions.
a. How much would the target’s shareholders receive from the acquirer, and how much of that total would be taxable?
b. How much would the target’s shareholders receive from the target firm, and how much of that total would be taxable?
c. How much in taxes would the target firm have to pay on any gains it realizes?
d. What would the total depreciable value of the target be once it has been acquired?