Types of Acquisitions – Quick Reference
Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election
[Link]
In a stock purchase the buyer acquires the seller’s stock from shareholders, all assets and liabilities,
and off-balance sheet items as well. In an asset purchase the buyer can pick and choose which assets
it wants to acquire and which liabilities it wants to assume. Unless it’s stated explicitly in the
purchase agreement, the buyer doesn’t get it.
In addition to both of those, there’s also a Section 338(h)(10) Election, which allows a stock purchase
to be treated like an asset purchase for accounting purposes.
Stock Purchase Asset Purchase 338(h)(10) Election
Sellers: Shareholders Corporate Entity Shareholders
Assets & Buyer gets everything Buyer picks and chooses Buyer gets everything
Liabilities:
Valuation Book values used, but Every single asset/liability
Book values used, but
of Assets & modified for any step-ups must be valued separately modified for any step-ups
Liabilities: or step-downs or step-downs
Seller Single Taxation – Double Taxation – taxes on Double Taxation – taxes on
Taxes: Shareholders pay capital Purchase Price Minus Fair Purchase Price Minus Fair
gains tax Market Value as well as on Market Value as well as on
shareholder proceeds shareholder proceeds
Book Basis: Assets/liabilities stepped Assets/liabilities stepped Assets/liabilities stepped
up or down for accounting up or down for accounting up or down for accounting
purposes purposes purposes
Tax Basis: Buyer assumes seller’s tax Buyer receives tax step-up Buyer receives tax step-up
basis for assets/liabilities for assets/liabilities for assets/liabilities
Goodwill & Not amortized for tax Amortization is tax- Amortization is tax-
Other purposes and not tax- deductible; amortized over deductible; amortized over
Intangibles: deductible 15 years for tax purposes 15 years for tax purposes
Seller Buyer can apply Section Completely lost in Completely lost in
NOLs: 382 post-transaction to transaction transaction
reduce taxes
Complexity: Inexpensive and quick to Complex and time- Inexpensive and quick to
execute consuming – need to value execute
and transfer each asset
Used For: Most public/large Divestitures; distressed Private companies;
companies sales; some private compromise between
companies buyer and seller
Preferred Sellers Buyers Both
By:
Types of Acquisitions – Quick Reference
Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election
[Link]
Ok, so how does all of this actually affect our merger model?
Stock Purchase Asset Purchase 338(h)(10) Election
Combined Add all seller’s assets and Only add the seller’s assets Add all seller’s assets and
Balance liabilities (assume and liabilities that the liabilities (assume
Sheet: shareholders’ equity is buyer is acquiring; adjust shareholders’ equity is
wiped out); adjust for for write-ups and write- wiped out); adjust for
write-ups and write- downs and new items write-ups and write-
downs and new items created in acquisition downs and new items
Goodwill =Equity Purchase Price – =Equity Purchase Price – =Equity Purchase Price –
Created: Seller Book Value + Seller Seller Book Value + Seller Seller Book Value + Seller
Existing Goodwill – PP&E Existing Goodwill – PP&E Existing Goodwill – PP&E
Write-Up – Intangibles Write-Up – Intangibles Write-Up – Intangibles
Write-Up – Seller Existing Write-Up – Seller Existing Write-Up – Seller Existing
DTL + Write-Down of DTL + Write-Down of DTL + Write-Down of
Seller’s Existing DTA + Seller’s Existing DTA Seller’s Existing DTA
New DTL Created
Goodwill Not amortized for Not amortized for Not amortized for
Treatment: accounting purposes; not accounting purposes; accounting purposes;
amortized over 15 years
amortized for tax purposes amortized over 15 years
and not tax-deductible for taxes and tax- for taxes and tax-
deductible deductible
Intangibles Amortized for accounting Amortized for accounting Amortized for accounting
Treatment: purposes; not tax- purposes; tax-amortized purposes; tax-amortized
deductible over 15 years and tax- over 15 years and tax-
deductible deductible
Depreciation Affects Pre-Tax Income but Affects Pre-Tax Income Affects Pre-Tax Income
from PP&E not tax-deductible and tax-deductible and tax-deductible
Write-Up:
New DTL Total Asset Write-Up * $0 $0
Created: Buyer Tax Rate
Annual Seller’s Equity Purchase $0 $0
NOL Usage Price * MAX(Previous 3
Allowed: Month’s Adjusted Long-
Term Rates)
DTA Write- =MAX(0, NOL Balance – Subtract entire NOL Subtract entire NOL
Down: Allowed Annual Usage * balance from DTA balance from DTA
Years Until Expiration)
Types of Acquisitions – Quick Reference
Stock Purchase vs. Asset Purchase vs. 338(h)(10) Election
[Link]
What’s the net impact of all these tax items on our merger model?
Surprisingly, they don’t do that much. You calculate the book income tax expense – what the
company should owe in taxes based on its pre-tax income and tax rate – and then calculate the cash
income tax expense – what they actually pay based on their NOL usage, and how intangibles,
goodwill, and depreciation are deducted or not deducted for tax purposes.
If the combined company owes more in cash taxes than it does in book taxes, we record that by
decreasing the deferred income tax liability (DTL) on its balance sheet; if it owes less in cash taxes
than it does in book taxes, we increase its deferred income tax liability (DTL).
Some of these tax details may seem confusing, and that’s because they are. It takes some time to get
used to all the rules.
However, keep in mind that in most cases all these tax details don’t impact the merger model
output very much unless we have a really unusual situation.
