M&A: A Practical Guide to Doing the Deal, 2nd Edition

CHAPTER 22 Unusual Transaction Categories

In my M&A travels, businesspeople invariably ask, after a more general discussion, about a few specific transactions: tax-free deal, de-merger, reverse merger, special-purpose acquisition corporation (SPAC), and hostile takeover. These transactions are in the minority but they get a disproportionate amount of publicity. This chapter reviews these deals.

We begin our review of these five transactions with the tax-free deal.

Tax-Free Deal

A tax-free deal does not eliminate income taxes (or capital gain taxes) for the seller; it simply pushes such taxes into the future. A seller’s owners (in the United States) can avoid paying capital gains tax on buyer common stock as consideration, usually as long as the voting stock represents 50 percent or more of total consideration. The seller pays the tax when it eventually liquidates the buyer’s stock in a taxable transaction.

In large public company mergers, the buyer often offers the seller’s shareholders the option of accepting either cash or buyer stock as consideration. The $22 billion Sprint/Softbank merger (2013) had such a feature. This tactic enables the seller’s shareholders taking Softbank stock to defer taxes.

A seller who accepts buyer stock may find his investment portfolio to be concentrated in one security. No problem. Wall Street has tactics that diversify the portfolio without triggering a tax.

DEMERGER

Many publicly traded companies become larger through mergers. A “de-merger” ...