Tax counsel, and valuation analysts and other financial advisers (analysts), are often retained to advise acquisitive clients with regard to proposed merger and acquisition (M&A) transactions. The analysts typically focus on the pricing and structuring of the proposed M&A transaction, while tax counsel consider all of the income tax and other tax planning and compliance issues related to structuring and completing the M&A transaction. The analysts may be expected to work with, and provide assistance to, the acquirer’s taxation, legal, and other professional advisers, particularly in the assessment of the risks and expected returns of the proposed transaction. Accordingly, with analysts in a supporting role, tax counsel should be aware of all of the taxation considerations with regard to the proposed M&A transaction.
Tax counsel should be aware that when one of the transaction participants involves a loss corporation (or a target company with certain other tax attributes), the IRS may allege that the principal purpose of the proposed transaction is to evade or avoid income taxes. Of course, the target entity’s tax attributes should not be ignored in the consideration and pricing of the proposed M&A transaction, but they should not be the principal reason for the transaction.
Tax counsel should be prepared to assist the acquirer in defending against any IRS challenge to the tax motivations for the proposed transaction. That is, tax counsel should be prepared to assist the acquirer to understand and document the non-tax-related economic benefits that are the primary reasons for—and the primary value drivers of—the proposed M&A transaction. M&A announcements and completions continue to occur at a brisk level in many industries throughout the U.S. economy. This generally positive trend in M&A activity continues despite general concerns about COVID-19 as a national health issue and despite the negative impact of the pandemic on the national economy.
The typical reasons for M&A in most industries remain the same, regardless of the national health impacts and the national economic effects of the COVID-19 pandemic. Tax counsel should be aware that some of the reasons for clients to consider a potential M&A transaction include: (i) the economies of scale and of size related to the combined entity; (ii) the elimination of a competitor (due to the consolidation) resulting in geographic concentration; (iii) the combination of different industry segment participants into a more diversified combined company; (iv) the ability of the transaction acquirer to “buy” (acquire) business functions and capabilities at a lower cost than the cost to “make” (internally develop) business functions and capabilities; (v) the availability of low-interest-rate debt financing and of plentiful equity financing that is looking for investment opportunities; and (vi) the availability of otherwise successful target companies that do not have other management/ownership succession options available to them.
The Practical Tax Lawyer
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