Question

How do tax consideration impact the valuation of the target company and the combined M & A companies?

Answer 1

The tax plays an important role in the M&A deal and its negotiations. As it is a legal aspect in nature which have the direct implication on the outcome of a deal.

The structure of the transaction is the most important aspect which has the direct impact on the target. There are many ways to structure the transaction, which includes commonly used structures as asset purchases and stock purchases. Based on this the transaction can be either fully taxed, partially taxed or not at all taxed.

The stock sale happens between the buyer and shareholders of the seller. The seller doesn't recognize any corporate level gain. This is particularly beneficial for the target company and its shareholders since the taxation happens only at the shareholder level and avoids any double taxation.

Asset sale however is beneficial for the buyer as the buyer can claim higher depreciation on the asset to reduce its market fair value whereas for seller it is non favourable as the seller may subject to double taxation if the entity being sold is a C corporation. Also if the entity being sold is a S corporation but earlier was a C corporation there is a 10 year recognition period for built in Gains.