Question

Give 3 examples of how tax considerations can motivate mergers.

Answer 1

Among various motivators, Tax advantages are one reason why would 2 companies hope to merge:

1. Unused net operating Losses: There are cases when one organisation incurring losses on its operations from long tend to gather huge amount of operating losses (from tax point of view). The other profitable organisation will merge with that organisation (loss making) with an intent to use those unused losses to mitigate its tax expense.

2. Substituting capital gains for ordinary income: There are cases where selling on one monetary asset is taxed as a capital gain in one org and ordinary income in another. This depends on how that specific is treated in the different business's. We know how expensive capital gain taxation can be as compared to ordinary income thus a company to swap its capital gain tax liability with ordinary income tax liability can go with merger of buying that org where X's capital asset is Y's stock.

3. Asset write-up: It means increase made to the value of the asset of the organisation to its fair value. This may occur when the org undergoes a merger where the entire asset sheet is fair valued using purchase method of M&A accounting. This is one reason why a org may go on with merger or acquisition.