3 major methods of facilitating acquisitions

• Asset acquisitions: purchase only assets; the higher price paid for the assets is amortized and deductible for tax purposes.
• Stock acquisitions: purchase the whole entity, including all assets and liabilities; the higher price paid, specifically goodwill, is not amortized.
• 338(h)(10) elections: best of both worlds; available to buyers of subsidiaries and S corporations

S corporation refers to the special status entity exempted from paying CIT which allows shareholders to be taxed only once when they receive the benefits to avoid from double taxation

Impact of the depreciation of the assets acquired on the 3 FS

Assuming we’ve just acquired a $200MM asset, which has a 10-year useful life; the tax rate is 40%

Income statement

• Depreciation expense: (20)
• Tax: 8

=> Net income: (12)

Cash Flow statement

• Depreciation expense: 20
• Net income: (12)

=> total change in cash: 8

Balance sheet

Assets

• Cash: 8
• PP&E: (20)

=> total change in assets: (12)

Liability and Equity

• Retain earnings: (12) (due to the reduction in Net income)

=> total change in Liability and Equity: (12)

Next, assume the accelerated depreciation of 20% is used for tax purposes.

=> deferred tax would be $8MM [(40-20) * 40%]

Cash Flow statement

• Deferred taxes: 8

Balance sheet

Assets

• Cash: 8

Liability and Equity

• Deferred taxes: 8

Major effects of asset acquisitions

• Reduce EPS due to the increase in Depreciation, but as it’s a non-cash item, it’s considered a method for tax benefits.

Content source: Paul Pignataro. (2020) Mergers, Acquisitions, Divestitures, and Other Restructurings.