CAPESTERS!

[Rich]

http://www.ustyleit.com/Merger_and_Acquisition_Templates.htm

There are basically three kinds of mergers:


pooling of interests
a consolidation
or a purchase.
The pooling of interest merger puts the two companies' assets together and combines all the accounts. The consolidation is when a new entity is formed and both the companies are bought and combined under the new entity. The purchase is when one company buys another. In the strictest sense, only when one of the companies survives as a legal entity is there a merger.

Here are some of the tax consequences of the mergers.



Pooling of Interest: stock is exchanged between two companies and one entity survives. This is a tax free merger, and if you own the company that is being merged, you will receive stock in the surviving company. That stock will have the same basis as your original purchase price, and you have no tax consequence. You simply put the new stock in your portfolio in exchange for the old stock.



Purchase: When one company buys another using cash or a debt instrument, the stock of the acquired company is sold for the agreed upon amount and triggers a taxable event. The reason companies will sometimes use this method is that there is a tax benefit to the acquiring company. They can write-up the assets they acquire to the actual value paid for the company, and the difference between the book value and that purchase value for the assets can be charged off as depreciation over several years, thereby lowering the taxes payable by the surviving entity.



Consolidation: This would be treated the same as the Purchase merger.

There are also several types of economic mergers:



Horizontal Merger: When two companies that are in direct competition in the same product lines and markets combine.



Vertical Merger: When a customer and company or when a supplier and company merge. Think of a cone supplier to an ice cream maker.



Market Extension Merger: When two companies combine that sell the same products in different markets.

Product Extension Merger: When two companies are selling different but related products in the same market.



Conglomerate Merger: When two companies have none of the above attributes get together.

The hope of every merger is that there will be a synergy making the whole of the two companies greater than the sum of the two. Sometimes it works; sometimes it doesn't.



An Acquisition of one company by another is a little different from a merger but not much. All of the above reasons for combining two companies apply, but instead of swapping stock or consolidating under a new corporate entity, one company simply buys another. Sometimes it's done in a friendly way. Sometimes it's done in a way best described as hostile. Another name for the unfriendly acquisition is a Takeover.



In an acquisition, a company can buy another company with cash, with stock, or a combination of the two. The difference between the merger purchase and an acquisition depends on whether the purchase is friendly and announced as a merger or announced as an acquisition or the purchase is unfriendly. When it's unfriendly, it's always an acquisition.

When Company A buys Company B with cash, the shareholders of Company B have a taxable event because they exchange their shares for cash. If Company A issues stock to purchase Company B, then there is an exchange of shares and there is no taxable consequence for the shareholders.