Question

Analyze the benefits of efficiencies and tax breaks in relation to leveraged buyouts and describe an example of how a Fortune 500 Company has benefited from both in the recent past.

Answer 1

The Main benefit of leverage buyouts is tax benefits and the benefits are not only restricted to the buying party there are several other benefits which a seller can enjoy as well.

It can bring stability to seller's business a desired price.

also, from a buyers perspective they might get a business or a company which is already set and less cost is involved in this type of buyouts. especially if one is purchasing a smaller company that can get higher returns than the acquisition company’s debt financing is beneficial to stockholders of both companies and the value of the company as a whole increases.

There are various types of leverage buyouts such as:

1.Going Public to Private

2. Management Buyouts                 

3. Corporate restructuring

Tax benefits:

• Leveraged buyouts create tax shields that, under the United States tax code, allow companies to deduct interest paid on debt as an expense, unlike dividends paid to equity shareholders, which cannot be expensed . For instance, a company that faces a large tax burden can benefit from increased debt financing because the interest is accounted for as an expense, which is tax deductible. Therefore, increasing interest expense results in a significantly lower tax obligation owed to the IRS.

? ESOP - An employee stock ownership plan is an employee-owner program that provides a company's employees with an ownership interest in the company. this could be once of the tax benefit in leverage buyouts. ESOP-based leverage buyouts provide unique tax reduction opportunities. In an ESOP buyout, both the interest and principal repayment are deductible. Also, a private corporation can choose an S corporation tax status election, which shields the percentage of income owned by the ESOP from income taxation. Additionally, ESOPs that own 100 percent of the company stock, under the S corporation tax election, can avoid all federal income tax owed at both the corporate and individual shareholder level.

Example:

PepsiCo is highly benefited from the merger and Quaker also being a mega brand in itself but merging with a company like PepsiCo strengthens its position even more as thirsty people will either go to the carbonated or non-carbonated drinks and now they have the command to both sections and as a result to which the company will be retaining both the customer bases.

Gatorade has its monopoly in the sports drink segment so it will rather increase the sales of PepsiCo's other fast food since drinks and fast food complement each other well. PepsiCo will be highly benefited by the advantage of being the major supplier as it can control the prices and monopolize the market as well.