Complex Deals Discussion of Homework 3 BushmanComplex Deals
Complex Deals Discussion of Homework 3 Bushman-Complex Deals Homework 3 - Key 1
The Data Set Bushman-Complex Deals Homework 3 - Key 2
The Data Set This relates to BV of PP&E on T’s pre-deal balance sheet: $6, 200/20 = $310 Bushman-Complex Deals Homework 3 - Key 3
13, 780 0 Without a 338(h)(10) election, the acquirer will receive carry-over tax basis in T’s net assets, and there will be no step-up to fair value on the target’s tax balance sheet. This implies that the tax basis of GW and other intangibles = 0. It also requires that a DTL be set up due to differences between the financial reporting and tax balance sheets. Bushman-Complex Deals Homework 3 - Key 4
12, 100 • Under a 338(h)(10) election, the acquirer steps up the tax basis of the net assets to fair values, including the establishment of a positive tax basis for Goodwill. • Because of step-up, Financial reporting values = tax basis, including GW. This implies that no DTL is needed in the purchase price allocation. Bushman-Complex Deals Homework 3 - Key 5
1, 003. 3 1, 230 • • 196. 6 1, 003. 3 With 338(h)(10), A gets stepped up basis; e. g. , gets a tax basis in intangibles assets, including GW, and these intangibles will be amortized over 15 years as 197 intangibles. With no 338(h)(10) election, A will get carryover tax basis in the target’s net assets. Thus, there will be no incremental amortization for tax purposes. FRNI with & without 338(h)(10) NI before Acquisition accounting Incremental Depreciation/Amortization PP&E Intangibles Goodwill $1, 230. 0 160. 0 66. 7 0. 0 $1, 003. 3 3200/20 1000/15 Goodwill not amortized for financial reporting Bushman-Complex Deals Homework 3 - Key TI with 338 TI No 338 $1, 230. 0 160. 0 66. 7 806. 7 $196. 6 0. 0 12, 100/15 0. 0 $1, 230. 0 Stepped up basis: 197 intangibles amortized over 15 years for tax purposes No 338(h)(10) => no incremental tax shield as A only gets carryover basis in T’s assets 6
36. 03 • Recall that under 338(h)(10), the selling group computes taxable gain on the stock sale using the NIB of the target, rather than the selling corp. ’s outside basis (OB) in the stock. • If OB > NIB, the selling corp. will owe incrementally higher taxes on the sale of target’s stock under a 338 election, and will thus will demand additional compensation. The fact that NIB< OB means that under a 338, the selling group matches this lower NIB against the selling price of the stock to compute taxable gain. This $36. 03 difference implies that selling group requires $19. 4 in additional payments to make them indifferent between a 338 and no 338 election. Bushman-Complex Deals Homework 3 - Key 7
No. Liberty Interactive held 57% of the voting rights in trip advisor, so they consolidated Trip. Advisor rather than using the equity method. • Also note that Liberty Interactive put $350 of debt into Trip. Advisor Holdings before the spin-off • Further, they also extracted a $350 million dividend from Trip. Advisor Holdings financed by Holdings taking on a $400 million loan. Bushman-Complex Deals Homework 3 - Key 8
NCI $4, 474 Retained earnings 465 APIC 465 AOCI 6 Net Assets – Discontinued Operations 5, 398 Bushman-Complex Deals Homework 3 - Key Liberty Interactive held 22% of the cash flow rights in Trip. Advisor, implying that there was a large NCI in Trip. Advisor prior to the spin-off 9
Note, Malone holds 29% of Liberty Trip. Advisor Holdings, and so stands to gain from a bidding war between Trip. Advisor, Priceline and Expedia! Bushman-Complex Deals Homework 3 - Key 10
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