Coatings World - April 2016

Strategies & Analysis

There are three basic questions an executive must answer to achieve an informed judgement for any type of financial purchase: cost, return and risk.

by Phil Phillips, PhD

Contributing Editor phillips@chemarkconsulting.net

There are three basic questions an execu- tive must answer to achieve an informed judgment for any type of financial
purchase:
• COST... what will the asset cost?

• RETURN... What return on this invest-
ment can we expect (cash flow; payback
period; net present value . . . . ROI
• RISK... what is probability of achieving
the expectations... ROI?

The executive answers these questions by requesting comparative bids, internal studies, research reports, industry information, consultant’s opinion or, a capital budgeting analyses.

The COST Dilemma...

Alternative Acquisition Methods The difficulty with placing an acquisition in the standard purchase pattern is that it may not lead to an understanding of the true cost of the deal. The standard practice pattern only applies if the acquiring company is making one type of acquisition . . . an ASSET ACQUISITION. If any one of the other five methods of consummating the deal is used, the executive may not fully understand the true cost of the acquisition to that of the acquiring company.

The six basic alternative tax methods for
consummating an acquisition are:
• Asset Acquisition
• 338 Transaction
• Stock Acquisition
• Type A Reorganization
• Type B Reorganization
• Type C Reorganization

Asset Deal: The acquiring company purchases a part or all of the assets of the target company for cash, stock, securities, or other considerations. Payment is made to the target company which remains in existence subsequent to the transaction. The transaction is generally a taxable sale by the target company of its assets.

338 Transaction: The acquiring company pur-
chases the stock of the target from the target’s
shareholders for cash, stock securities, or other con-
sideration and elects pursuant to IRS Code Section
338 by the 15th day of the ninth month after the
month of acquisition to treat the transaction as if
the target company sold its assets for a price equal
to their fair market value. This transaction is a tax-
able sale by the target’s shareholders of their stock.

Stock Acquisition: The acquiring company purchases the stock of the target for cash, stock, securities, or other consideration. This transaction is a taxable sale by the target’s shareholders of their stock.

Type A Reorganization: Type A Reorganization the acquiring company purchases the target through merger or consolidation. The acquiring company pays for the acquisition by exchanging various considerations, i.e., voting or non-voting common or preferred stock, cash, securities, or other considerations. Any combinations of these considerations are acceptable just as long as greater than 50% of the total paid is some form of equity security. The deal is nontaxable to all parties if only equity securities are used by the acquiring company. However, if cash, securities, or other considerations are exchanged, the target’s stockholders will be taxed.

Type B Reorganization: In Type B, the acquiring company uses its own voting stock to purchase the stock of the target. This type transaction is nontaxable to all parties involved.

Type C Reorganization: In Type C, the acquiring company purchases substantially all of the target company’s assets with its own voting stock. In certain instances the acquiring company can give as part of the consideration, a minor amount of cash, nonvoting stock, securities, or other consideration. Generally, this transaction is nontaxable to all parties involved.

It must be pointed out that each of these various acquisition methods can result in significant differences in the true economic cost of the acquisition to the acquiring company.