test powerpoint
TRANSCRIPT
- 1. REVERSE MORRIS TRUSTTRANSACTIONVerizon Fairpoint MergerClaire Cui, Lychee He, Junichi Hara, Ronald Klein, Christina Ko, AlexanderBurtka, Claire Zhang
- 2. Agenda Verizon/Fairpoint Background Verizons options Solution: Reverse Morris Trust Result/Opinions
- 3. Its 2008 iPhone 3G came out (only for AT&T)
- 4. Verizon Fairpoint Transaction
- 5. BackgroundVerizon had two main businesses:1.Wireline2.Wireless
- 6. Background Wireline business declining, wireless growing Operating Profit of Verizons Segments$16,000MM$14,000MM$12,000MM$10,000MM$8,000MM$6,000MM$4,000MM$2,000MM$0MM200120022003 200420052006 2007 2008 Wireline Wireless
- 7. Objective: Sell off wirelines Verizon wanted to dump sell its wirelinebusiness, via Reverse Morris Trust Trans. Needed to find a smaller firm willing to buy
- 8. Target: Fairpoint Comm.
- 9. Fairpoint Communications Small telecommunications firm Mostly focused on rural areas Merger would make Fairpoint eighth largesttelecommunications firm
- 10. What is a Reverse Morris Trust?A loophole firms can exploit to sell a part of its businessTax freeMade up of two components Dougiesad1)A tax free spinoff2)A tax free merger
- 11. Part 1: Tax Free spinoff
- 12. Whats a spinoff? A parent company distributing shares of asubsidiary to shareholders, i.e A dividend Subsidiary becomes a separate, independentcompany Commonly done to separate unrelated and/orunwanted parts of business
- 13. Example: Altria spins-off Kraft
- 14. Whats a spinoff?Animation here
- 15. Taxable spinoffs Normally (uh-oh), spinoffs are taxed, just like anyother dividend
- 16. Taxable spinoffsExample: ParentCo gives all of its shares in SubCo toParentCo shareholders Shareholders get dividend taxed But ParentCo must also recognize a gain
- 17. Taxable spinoffs Why is ParentCo taxed as well? Because they would have been taxed if they soldthe subsidiary and gave a cash dividend instead
- 18. Double taxation How many layers of tax? Regular stock sale (and dividend): Two Taxable spinoff: Two Normally
- 19. The tax-free* spinoff If a company meets a number of requirements (per 355) the spin-off can be tax-free* *Technically tax deferred. The basis in the sub. stockis carried over to shareholders What are the requirements?
- 20. Requirements
- 21. The tax-free spinoff We wont cover them all, but the big one: Must have a business purpose (i.e., non-taxpurpose) for the spinoff E.g. To focus on our core competencies So if a firm wanted to separate a subsidiary forstrategic reasons (rather than selling it) it could do ittax free Non-tax purpose. Righttt
- 22. Morris Trust Transactions Many firms took advantage of the tax-free spinoffin order to sell subsidiariesThe old school Morris Trust Transaction: Conduct a tax-free spinoff Buyer then purchases the spunoff sub.s stock fromthe shareholders and acquires subsidiary
- 23. Morris Trust Transactions How many layers of tax? Regular stock sale (and dividend): Two Taxable spinoff: Two Tax-free spinoff (followed by sale): One The shareholders would recognize a capitalgain, but the parent would recognize nothing We beat Dougie!
- 24. Dougie Strikes Back Dougie didnt think that was funny
- 25. Retroactive tax In response, tax law was changed so that: If a tax-free spinoff is followed by S beingacquired within two years IRS will retroactively tax the original spinoff
- 26. Back to square oneRecap: How many layers of tax? Regular stock sale (and dividend): Two Taxable spinoff: Two Tax-free spinoff (followed by sale): One Two So after all that, Dougie will tax us twice Normally (aww huh? Yay!)
- 27. Part 1: Tax-Free Spinoff
- 28. Part 2: Tax-Free Merger
- 29. Re-visit: Retroactive Tax Rule A tax-free spinoff is retroactively taxable to theparent company, if: The subsidiary is acquired within two years So then what if The subsidiary is the acquirer?
- 30. Definition of BuyerWhos the buyer? If a A pays cash for Bs stock? Company A If a A pays cash for Bs assets? Company A If company A exchanges company A stock forcompany B stock? Depends
- 31. Buyer If stock is exchanged for stock, then the buyer isdefined as the company whose shareholders obtainmajority control (>50%) i.e. The company thats bigger
- 32. Reverse Morris Trust If a tax-free spinoff is followed by the spun offsubsidiary merging with a smaller firm And stock is given for stock (a tax-free merger) Then the subsidiary is considered the buyer The parent avoids the retroactive taxation And the shareholders defer tax on the sale! We beat Dougie!!!
- 33. Take thatIRS!
- 34. Drawback: Majority ControlThe main drawback is that the spunoff subsidiary has to be bigger than the buyerAs a consequence:1.Limits pool of potential buyers for sub.2.Buyer and its shareholders may not likebecoming minority interest
- 35. Tax Free Sale! But aside from that, a Reverse Morris Trusttransaction, i.e.Atax free spinoff A tax free merger (with a smaller company) Allows a company to sell a subsidiary tax free
- 36. The graveyard
- 37. AnimationSpinoff SHs Parent SHsSubsidiary Parent Subsidiary
- 38. Taxable spinoffs ParentCo shareholders are now the proud owners ofSubCo, and They recognize a $1000K dividend Ouch. But thats not too bad Dougie aint done
- 39. Taxable spinoffs In addition to ParentCo shareholders recognizing a$1000k dividend ParentCo itself also recognizes a gain Double ouch, baby
- 40. Taxable spinoffs Gain = FMV of Sub. Basis in Sub. ParentCos gain = $1000k-500k=$500k So in total: ParentCo shareholders: $1000k dividend ParentCo: $500k gain
- 41. Morris Trust Transaction Example ParentCo spins off SubCo tax free Shareholders have a basis of $500K in SubCo BuyerCo buys all the stock from shareholders for $1000K Shareholders recognize capital gains of $500K Parent CompanyParentTotal TaxableShareholdersIncomeSell Sub. + Dividend $500K$1000K $1500KSpinoff Sub. $500K$1000K $1500KMorris Trust Trans.-$500K $500K
- 42. Example revisited In the last example: ParentCo made a tax free spinoff Shareholders recognized $500K capital gains Since the acquisition happened within 2 yearsParentCo will be retroactively taxed on spinoff Shareholders not taxed on dividend