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Merger motives:

Motives behind managers decisions are in many experiments given as self evident. To list Some motives found earlier are e.g.: 1) To create a number of new business opportunities (Healy et al. 1990, 23) and entry new markets (Black, Carnes and Jandik 2001,5); institutional owners support specially this Managerial goal of growth (Bethel and Liebeskind 1993, 29); Acquirers of healthy Companies hold to growth motives more often than those who acquired unhealthy Companies (Kitching 1973 via Hunt 1990) 2) To reduce earnings volatility (Healy et al. 1990, 23; Black, Carnes and Jandik 2001,5) 3) Technical Efficiency (Chaaban, Rquillart and Trvisiol 2005) and economies of scale 4) Parallel i.e. contagious M&As (berg and Holtsrm 2006), there is a kind of Economical force major to stay competitive for customers while they are merging.6 In the 60s and early 70s there was a surge of the conglomerate (Kitching 1973 via Hunt 1990) but during 80s there was a shift away from conglomerate diversification (Hunt 1990); Divestment is an option which management is likely to hold in reserve (Montgomery and Thomas 1988, 95) 5) decreased undiversifiable employment risk i.e., risk of losing job, professional Reputation, etc. Managers personal wealth is linked more to firm size and risk of Bankruptcy than to firm performance (Amihud and Lev 1981). The merger offers an Opportunity to improve ones social identity as well (Terry, Callan and Sartori 1996) 6) Value maximization (Halpern 1983, 314) is specially a shareholders goal (Bethel and Liebeskind 1993, 29) 7) Use of control position (Halpern 1983, 314) 8) Synergy (Halpern 1983, 314; Chatterjee 1992)

9) Monopoly (Halpern 1983, 314) 10) Corporate restructuring is needed industry wide (Hatfield, Porter Liebeskind, Opler 1996; Markides 2006; Chatterjee 1992) 11) Cost reduction (Dranove and Shanley 1994) 12) Managerial vs. shareholder interests (Taffler, Holl 2006; Holl and Kyriazis 1997; Mahoney and Mahoney 1991; Mahoney and Mahoney 2006; Firth 1991). Motives for Takeovers tend to reflect managerial rather than shareholder interests in abandoned Mergers (Taffler and Holl 1991). Amit, Livnat and Zarowin (1989) have investigated Owner-manager conflict of interest. 13) Reputation enhancement (Dranove and Shanley 1994): local systems do not appear to have lower cost but do appear to enjoy reputation benefits 14) Innovation performance (Ahuja and Katila 2001) 15) Resource redeployment (Capron, Dussauge and Mitchell 1998) 16) Power, achievement, sensation seeking and prestige (Lausberg and Stahl 2006) 17) Horizontal, vertical, product extension, market extension M&A. Motives of merger: Mergers and acquisitions are strategic decisions leading to the maximization of a companys growth by enhancing its production and marketing operations. They have become popular in the recent times because of the enhanced competition, breaking of trade barriers, free flow of capital across countries and globalization of business as a number of economies are being deregulated and integrated with other economies. A number of motives are attributed for the occurrence of mergers and acquisitions. 1. Synergies through Consolidation: Synergy implies a situation where the combined firm is more valuable than the sum of the individual combining firms. It is defined as two plus two equal to five (2+2=5) phenomenon. Synergy refers to benefits other than those related to economies of scale. Operating economies are one form of synergy benefits. But apart from operating economies, synergy may also arise from enhanced managerial capabilities, creativity, innovativeness, R&D and market coverage capacity due to the complementarily of resources and skills and a widened horizon of opportunities.

An under valued firm will be a target for acquisition by other firms. However, the fundamental motive for the acquiring firm to takeover a target firm may be the desire to increase the wealth of the shareholders of the acquiring firm. This is possible only if the value of the new firm is expected to be more than the sum of individual value of the target firm and the acquiring firm. For example, if A Ltd. and Ltd. decide to merge into AB Ltd. then the merger is beneficial if V (AB)> V (A) +V (B) Where V (AB) = Value of the merged entity V (A) = Independent value of company A V (B) = Independent value of company B 2. Diversification A commonly stated motive for mergers is to achieve risk reduction through diversification. The extent, to which risk is reduced, depends upon on the correlation between the earnings of the merging entities. While negative correlation brings greater reduction in risk, positive correlation brings lesser reduction in risk. If investors can diversify on their own by buying stocks of companies which propose to merge, they do not derive any benefits from the proposed merger. Any investor who wants to reduce risk by diversifying between two companies, say, ABC Company and PQR Company, may simply buy the stocks of these two companies and merge them into a portfolio. The merger of these companies is not necessary for him to enjoy the benefits of diversification. As a matter of fact, his home-made diversification give him far greater flexibility. He can contribute the stocks of ABC Company and PQR Company in any proportion he likes as he is not confronted with a fixed proportion that result from the merger. Thus, Diversification into new areas and new products can also be a motive for a firm to merge an other with it. A firm operating in North India, if merges with another firm operating primarily in South India, can definitely cover broader economic areas. Individually these firms could serve only a limited area. Moreover, products diversification resulting from merger can also help the new firm fighting the cyclical/seasonal fluctuations. For example, firm A has a product line with a particular cyclical variations and firm B deals in product line with counter cyclical variations. Individually, the earnings of the two firms may fluctuate in line with the cyclical variations. However, if they merge, the cyclically prone earnings of firm A would be set off by the counter cyclically prone earnings of firm B. Smoothing out the earnings of a firm over the different phases of a cycle tends to reduce the risk associated with the firm. Through the diversification effects, merger can produce benefits to all firms by reducing the variability of firms earnings. If firm As income generally rises when Bs income generally falls, and vice-a versa, the fluctuation of one will tend to set off the fluctuations of the other, thus producing a relatively level pattern of combined earnings. Indeed, there will be some diversification effect as long as the two firms earnings are not perfectly correlated (both rising and falling together). This reduction in overall risk is particularly likely if the merged firms are in different lines of business. The diversification motive is based on the proposition that if two risky projects are combined, then the risk of combination will be less than the weighted average of the risk of these two projects. The greatest benefit from diversification can be obtained by continuing firms from different industries i.e., conglomerate mergers; where two firms poorly correlated cash flows

merged to create a portfolio of a firms. But portfolio of firms in a conglomerate merger is costly as the acquisition of firms is a costly exercise. On the other hand, a shareholder can easily create a diversified portfolio of firms merely by holding the shares of diversified companies. This is much easier and cheaper than creating a portfolio of firms in conglomerate merger. Thus, firms diversify to achieve:

Sales and growth stability Favorable growth developments Favorable competition shifts Technological changes 3. Accelerated Growth Growth is essential for sustaining the viability, dynamism and value-enhancing capability of company. A growth- oriented company is not only able to attract the most talented executives but it would also be able to retain them. Growing operations provide challenges and excitement to the executives as well as opportunities for their job enrichment and rapid career development. This helps to increase managerial efficiency. Other things being the same, growth leads to higher profits and increase in the shareholders value. A company can achieve its growth objective by: Expanding its existing markets Entering in new markets. A company may expand and/or diversify its markets internally or externally. If the company cannot grow internally due to lack of physical and managerial resources, it can grow externally by combining its operations with other companies through mergers and acquisitions. Mergers and acquisitions may help to accelerate the pace of a companys growth in a convenient and inexpensive manner. Internal growth requires that the company should develop its operating facilities-manufacturing, research, marketing etc. Internal development of facilities for growth also requires time. Thus, lack or inadequacy of resources and time needed for internal development constrains a companys pace of growth. The company can acquire production facilities as well as other resources from outside through mergers and acquisitions. Specially, for entering in new products/markets, the company may lack technical skills and may require special marketing skills and/or a wide distribution network to access different segments of markets. The company can acquire existing company or companies with requisite infrastructure and skills and grow quickly. Mergers and acquisitions, however, involve cost. External growth could be expensive if the company pays an excessive price for merger. Benefits should exceed the cost of acquisition for realizing a growth which adds value to shareholders. In practice, it has been found that the management of a number of acquiring companies paid an excessive price for acquisition to satisfy their urge for high growth and large size of their companies. It is necessary that price may be carefully determined and negotiated so that merger enhances the value of shareholders. For example, RPG Group had a turnover of only Rs.80 crores in 1979. This has increased to about Rs. 5600 crores in 1996. This phenomenal growth was due to the acquisitions of a several

companies by the RPG Group. Some of the companies acquired are Asian cables, ceat, Calcutta Electricity Supply and company, SAE etc. 4. Increased Market power A merger can increase the market share of the merged firm. The increased concentration or market share improves the profitability of the firm due to economies of scale. The bargaining power of the firm with labour, suppliers and buyers is also enhanced. The merged firm can also exploit technological breakthroughs against obsolescence and price wars. Thus, by limiting competition, the merged firm can earn super normal profit and strategically employ the surplus funds to further consolidate its position and improve its market power. The acquisition of Universal Luggage by Blow Plast is an example of limiting competition to increase market power. Before the merger, the two companies were competing fiercely with each other leading to a severe price war and increased marketing costs. As a result of the merger, Blow Plast has obtained a strong hold on the market and now operates under near monopoly situation. Yet another example is the acquisition of Tomco by Hindustan Lever. Hindustan Lever at the time of merger was expected to control one-third of three million tonne soaps and detergents markets and thus, substantially reduce the threat of competition. Merger is not only route to obtain market power. A firm can increase its market share through internal growth or ventures or strategic alliances. Also, it is not necessary that the increased market power of the merged firm will lead to efficiency and optimum allocation of resources. Market power means undue concentration which could limit the choice of buyers as well as exploit suppliers and labour. 5. Purchase of assets at bargain price Mergers may be explained by the opportunity to acquire assets, particularly land, mined rights, plant and equipment at lower cost than would be incurred if they were purchased or constructed at current market prices. If market prices of many stocks have been considerably below the replacement cost of the assets they represent, expanding firm considering constructing plants developing mines, or buying equipment. Often it has found that the desired asset could be obtained cheaper by acquiring a firm that already owned and operated the asset. Risk could be reduced because the assets were already in place and an organization of people knew how to operate them and market their products. Many of mergers can be financed by cash tender offers to the acquired firms shareholders at price substantially above the current market. Even, so, the assets can be acquired for less than their current cost of construction. The basic factor underlying this is that inflation in construction costs not fully reflected in stock prices because of high interest rates and limited optimism (or downright pessimism) by stock investors regarding future economic conditions. 6. Increased external financial capability Many mergers, particularly those of relatively small firms into large ones, occur when the acquired firm simply cannot finance its operations. This situation is typical in a small growing firm with expanding financial requirements. The firm has exhausted its bank credit and has virtually no access to long term debt or equity markets. Sometimes the small firms have encountered operating difficulty and the bank has served notice that its loans will not be renewed. In this type of situation, a large firm with sufficient cash and credit to finance the requirements of the smaller one probably can obtain a good situation by making a merger

proposal to the small firm. The only alternative the small firm may have is to try to interest two or more larger firms in proposing merger to introduce completion into their bidding for the acquisition. The smaller firms situation might not be so bleak. It may not be threatened by nonrenewable of a maturing loan. But its management may recognize that continued growth to capitalize on its markets will require financing beyond its means. Although its bargaining position will be better, the financial synergy of the acquiring firms strong financial capability may provide the impetus for the merger. Sometimes the financing capability is possessed by the acquired firm. The acquisition of a cash rich firm whose operations have matured may provide additional financing to facilitate growth of the acquiring firm. In some cases, the acquiring firm may be able to recover all or part of the cost of acquiring the cash-rich firm when the merger is consummated and the cash then belongs to it. A merger also may be based upon the simple fact that the combination will make two small firms with limited access to capital markets large enough to achieve that access on a reasonable basis. The improved financing capability provides the financial synergy. 7. Increased managerial skills Occasionally, a firm will have good potential that it finds itself unable to develop fully because of deficiencies in certain areas of management or an absence of needed product or production technology. If the firm can not hire the management or develop the technology it needs, it might combine with a compatible firm that has the needed managerial personnel or technical expertise. Any merger, regardless of the specific motive for it, should contribute to the maximization of owners wealth. 8. Reduction in tax liability Under Income Tax Act, there is a provision for set-off and carry forward of losses against its future earnings for calculating its tax liability. A loss making or sick company may not be in a position to earn sufficient profits in future to take advantage of the carry forward provision. If it combines with a profitable company, the combined company can utilize the carry forward loss and save taxes with the approval of government. In India, a profitable company is allowed to merge with a sick company to set-off against its profits the accumulated loss and unutilized depreciation of that company. A number of companies in India have merged to take advantage of this provision. When two companies merge through an exchange of shares, the shareholders of selling company can save tax. The profits arising from the exchange of shares are not taxable until the shares are actually sold. When the shares are sold, they are subject to capital gain tax rate which is much lower than the ordinary income tax rate. A strong urge to reduce tax liability, particularly when the marginal tax rate is high is a strong motivation for the combination of companies. For example, the high tax rate was the main reason for the post-war merger activity in the USA. Also, tax benefits are responsible for one-third of mergers in the USA12. 9. Economies of Scale Economies of scale arise when increase in the volume of production leads to a reduction in the cost of production per unit. Merger may help to expand volume of production without a corresponding increase in fixed costs. Thus, fixed costs are distributed over a large volume of

production causing the unit cost of production to decline. Economies of scale may also arise from other indivisibilities such as production facilities, management functions and management resources and systems. This happens because a given function, facility or resource is utilized for a large scale of operation. For example, a given mix of plant and machinery can produce scale economies when its capacity utilisation is increased. Economies will be maximized when it is optimally utilized. Similarly, economies in the use of the marketing function can be achieved by covering wider markets and customers using a given sales force and promotion and advertising efforts. Economies of scale may also be obtained fro the optimum utilisation of management resource and systems of planning, budgeting, reporting and control. A company establishes management systems by employing enough qualified professionals irrespective of its size. A combined firm with a large size can make the optimum use of the management resource and systems resulting in economies of scale. 10. Vertical Integration Vertical integration is a combination of companies of companies business with the business of a supplier or customer generally motivated by a pure desire: a) To secure a source of supply for key materials or sources b) To secure a distribution outlet or a major customer for the companys products c) To improve profitability by expanding into high margin activities of suppliers and customers. Thus, vertical merger may take place to integrate forward or backward. Forward integration is where company merges to come close to its customers. A holiday tour operator might acquire chain of travel agents and use them to promote his own holiday rather than those of rival tour operators. So forward or downstream vertical integration involves takeover of customer business. Backward integration occurs when a company comes close to its raw materials or suppliers. The real gain can be achieved by integrating backward if raw material market is not perfectly competitive and firm has to buy raw materials at monopolistic prices hence merge to obtain control of supplies. There are many reasons why firms want to be integrated vertically at different stages. Some of these reasons are technological economies like avoidance of reheating and transportation cost as in the case of iron and steel producer. Transactions within a firm might eliminate costs of searching for prices, contracting, advertising, costs of communicating and coordination. Proper planning for production and inventory management may improve due to more efficient information flow within a single firm. Further, these merger help avoid inefficient market transactions and result in reduced exchange inefficiencies. Tata Teas acquisition of consolidated coffee which produces coffee beans and Asian Coffee, which possesses coffee beans, was also backward integration which helped reduce exchange inefficiencies by eliminating market transactions. The recent merger of Samtel Electron services (SED) with Samtel Color Ltd. (SCL) entailed backward integration of SED which manufactures electronic components required to make picture tubes with SCL, a leading maker of color picture tube. Thus, when companies engaged at different stages of production or value chain merge, economies of vertical integration may be realized. For example, the merger of a company engaged in oil exploration and production (like ONGC) with a company engaged in refining and marketing (like HPCL) may improve coordination and control.

Vertical integration, however, is not always a good idea. If a company does everything in-house, it may not get the benefit of outsourcing from independent suppliers who may be more efficient in their segments of the value chain. 11. Early entry and market penetration An early mover strategy can reduce the lead time taken in establishing the facilities and distribution channels. So, acquiring companies with good manufacturing and distribution network or few brands of a company gives the advantage of rapid market share. The ICICI, a leading financial institution secured a foot hold in retail network through acquisition of Anagram Finance Company and ITC classic. Anagram had a strong retail franchise, distribution network of over fifty branches in Gujarat, Rajasthan and Maharastra and a depositor base of over two lakhs depositors. ICICI was therefore attracted by the retail portfolio of Anagram which was active in lease and hire purchase, car purchase, truck finance, and customer finance. These acquisitions thus helped ICICI to obtain quick access to well dispersed distribution network. Further, market penetration means developing new and large markets for a company existing products. Market penetration strategy is generally pursued within markets that are becoming more global. Cross border merger are a means of becoming or remaining major players in such markets. Hence, this strategy is mainly adopted by MNCs to gain to new markets. They prefer to merge with a local established company which knows behavior of market and has established customer base. One such example is Indian market. Few instances of MNCs related mergers are: 1. Whirlpool Corporations entry into India by acquiring Kelvinator India. 2. Coca Cola while re-entering India market in 1993 acquired Parle, the largest player in market with several established brands and nationwide bottling and marketing network. 3. H.J. Heinz entered into India through acquisition of Glato Industries. 4. HLL acquired Dollops, Kwality, Milk food to gain an entry into ice cream market with the help of their marketing networks, production facilities, brands etc. 12. Revival of sick companies An important motive for merger is to turn around a financially sick company through the process of merger. Amalgamation taking place under the aegis of Board for Industrial (BIFR) fall under this category. BIFR found revival of ailing companies through the means of their with healthy company as the most successful route for revival of their financial wealth. Firstly, the purpose is to revive a group of sick companies by merging it with groups of healthy company by obtaining concessions from financial institution and government agencies and obtaining benefits of tax concessions u/s 72A of Income Tax Act, 1961. Secondly, it also helps to preserve group reputation. Some of the group companies which have amalgamated through the BIFR include Mahindra Missan Allwyn with Mahindra and Mahindra, Hyderabad, Allwyn with Voltas etc. BIFR motivated Rehabilitation Merger Year Transferor sick company Taken over by Transferee company

April 95 April 95 April 95 April 96 May 96 April 97

Tata Keltron Ltd. Titagarh Papers Mills Ltd. Pentasia Chemicals Ltd. Biax Ltd. Powmex Steels Ltd. Universal Steel Alloys Ltd.

Tata Telecom Ltd. Titagarh Steels Ltd. Asian Paints Ltd. Cimmco Birla Ltd. GKW Ltd. Bharat Gears Ltd.

13. Consolidation at Group level Group company mergers are generally initiated with a view to affect consolidation to derive critical mass to cut costs in order to achieve focus and eliminate competition. Such mergers within group are also aimed at restructuring their diverse units to create a more viable unit, to revive sickness, improve borrowed capital. There are few other micro economic reasons to decide on mergers with group consideration as their sole consideration:

To achieve economies of scale To reduce cost of administration and management expenses in companies within same group. To bifurcate business by floating separate products this is referred to as demerger. Example of restructuring and consolidation within the group companies is the case of Nirma Ltd. merging with it, its group companies, Nirma detergents, Nirma soaps and detergents, Shina soaps and detergents and Nirma chemicals. The objective was to make Nirma a strong and resilient corporate entity capable of facing global competition by restructuring management, sizable reduction in management costs and increased professionalism. Merger of Videocon groups Videocon Narmada Electronics with its flagship company Videocon International led to operating efficiencies by controlling costs under one head. 14. Following Parents Footsteps Some of mergers in India belonging to Multinational giants take place as a result of direct fall out of mergers of their parent companies taking place in their home countries. Some instances of such mergers are listed below: 1.As per the dictates of their parent companies, their two Indian counter parts, visa. The General Electric Company of India Ltd. and The English Electric Company of India Ltd. were merged from Ist April 1992 and changed their name to GEC. Alsthen India Ltd.( just like the GEC, Alsthen N.V. Ltd. formed by merger of two largest industrial groups The General Electric company plc. U.K. and Alcatel Alsthen, France) 2.Consequent of the merger of Grand plc. and Guiness plc. In London in Dec. 1997, their Indian offsprings IDL Ltd. and united Distilleries India Ltd. both liquor companies followed this in India. 3.Novartis India (51% of Novartis AG) was formed in India by the merger of Hindustan ciba Giegy and Sandoz India Ltd. in 1996 following the merger of their global parents. 15. Increase Promoters stake

Another motive for merger could be to increase the stake of promoters. Thus, A company which is family owned could be merged with B company which is a listed company with family stake in it. By the process of merger, the family stake could be consolidated without going through the complications of SEBI guidelines of 4th august 1994. So, mergers could be motivated by the need to enhance promoters holdings in post- merger company. For instance, Nanda familys holding in escorts Ltd. was 20% before merger. Its merger with Escorts Tractors Ltd. increased their holding by another 20%. Similarly, merger of Reliance Polythylene and Reliance Polypropylene into Reliance Industries swap ratio of 100: 30 and 100:25 respectively resulted in an increase in Ambanis stake from 23% to 37%. The higher stakes helps to ward off takeover bids. 16. Defensive Maneuver Merger can be used as shields for protection from raiders. A merger or acquisition can be used by a company as defensive maneuver to resist takeover by another company. If a firm feels that it could be acquired by another firm, it may consider getting involved in a merger game. In doing so, it is able to expand its size, making its acquisition very expensive. Also, by increasing market capitalization of the merged companys threat of takeover can be tackled. For instance, merger of Jindal Ferro Alloys with Jindal Strips helped Jindal Ferro Alloys improve its share price from Rs. 65 to Rs. 170 and market capitalization of Rs. 160 crores to Rs. 550 crores with the help of swap ratio of forty five Jindal strips for every hundred Jindal Ferro alloy shares. 17. Acquire Global Competitive strength With competitive forces resulting from globalization and deregulation, many industries have forced most corporate to consolidate. European and Asian market have become more receptive to merger and acquisitions. On the one hand, European countries face competitive pressures from creation of single Euro currency, on the other hand, Asian crisis has forced most Asian nations to look to the west for technological and capital support. Hence, merger are planned to acquire global competitive strength. After the pitched Battle against Multi National Company (MNC) in domestic arena, Indian companies have also felt the need of becoming global. The globalized business environment thus demands that Indian Industries also restructured. Its size and capacities are small as compared to MNCs. Industries have to increase its capacity, induct new technology and development markets. Globalization has thus resulted in major implications for industrial competitiveness by lowering the cost of labour and opening markets to a great number of producing firms. To meet the opportunities thrown open by fast growing world, generic market and to acquire global competitive strength. Cross border mergers and acquisitions are being resorted to such mergers provide opportunities for taking up larger projects. Also the merged company is able to compete more effectively with increased size. The recent acquisition of Tetley, the worlds largest Tea brands by Tata tea, the worlds largest integrated tea company has been driven by the fact that Tetley fits perfectly into Tata teas globalization drive and could be a perfect launch vehicle to achieve greater synergies in global arena. The acquisition has brought with it, greater market penetration, helped improve operating efficiencies and resulted in instant expansion of product lines of Tata tea Tetley combines. The process of globalization and increasing integration of Indian economy with the international market will have its impact sooner or later.

Ansoff suggested a number of reasons that are attributed to the occurrence of mergers and acquisitions. For example, it is suggested that mergers and acquisition are intended to:

Limit competition Utilize under-utilization market power Overcome the problem of slow growth and profitability in ones own industry Achieve diversification Gain economies of scale and increase income with proportionately less investment Establish a transnational bridgehead without excessive start-up costs to foreign market Utilize under-utilized resources-human and physical and managerial skills Displace existing management Circumvent government regulations Reap speculative gains attendant upon new security issue or change in P/E ratio Create an image of aggressiveness and strategic opportunism empire building and to amass vast economic powers of the economy. gain access to a

Accounting There are two types of accounting treatment (as disconnected from tax treatment) The desired treatment is Pooling of Interests Add up the balance sheets of the two companies at historical cost (assets, liabilities, other equity) <-- very simple A marriage of two companies Difficult to pass all of the requirements that FASB has set up for pooling (7 tests), including: No assets sales for x # of years No pre-agreed buyouts for a group of shareholders Cannot merge acquired company into a sub Cannot acquire a sub of a bigger company, merge it and call it a sub Generally, only financial institutions qualify for pooling (Fed requires an immediate writeoff of goodwill ag. Reg. Capital)

Tax and accounting treatment very similar Tax basis not adjusted, simply carried over Biggest failure to qualify for pooling: A subsidiary, contrived acquisition vehicle ( a single purpose acquisition entity) typically bids Not a true merger of equals, per se Alternative is Purchase Treatment Assets of one (and possibly both) must be written up to their Fair Market Value Liabilities are restated at market Any difference between FMV and the purchase price becomes goodwill Goodwill is expensed --> lowers earnings Book value is written up Possible to have tax-free carryover of basis while writing up the basis for accounting purposes -> 2 sets of books Statutory Merger: Tax Treatment: If pooling --> tax basis not adjusted, just carried over; tax-free transaction If purchase --> could be either taxable or tax-free Accounting TreatmentCould be either pooling or purchase Asset Purchase: Tax Treatment Almost always taxable Acquirer writes up the value of the assets and enjoys a depreciation benefit ("step up") going forward Seller pays tax on any difference between price and basis at ordinary rates if asset is depreciable, capital gains otherwise Accounting Treatment Must use purchase accounting

Stock Acquisition: Occurs when the acquirer obtains stock in the target in consideration for cash Tax Treatment Selling shareholders pay capital gains tax Acquiring company does not revalue the assets of the target, carrying over the old basis in assets and liabilities Unless the acquirer makes a 338(h)(10) election in which they have a deemed sale and repurchase of the assets, effectively marking-to-market the position Accounting Treatment Purchase accounting Accounting Treatment Tax Treatment Stat. Merger Pooling or Purchase Follows accounting treatment Asset Purchase Purchase Taxable with step-up and taxable to selling shareholders Stock Acquisition Purchase Tax-Free (no write-up) unless 338(h)(10) election; CG tax to selling S/HGenerally, only financial institutions qualify for pooling (Fed requires an immediate writeoff of goodwill ag. Reg. Capital)Tax-Free (no write-up) unless 338(h)(10) election; CG tax to selling S/H