My name is Ollie.

I work for Financial Edge, and we're the ones who are putting this webinar on.

Um, we teach a variety of, uh, well financial services professionals.

And, um, my job today is to do an hour webinar on m and a considerations.

Although actually the way it's gonna work out is we're gonna be talking quite a lot about asset and equity deals and the tax implications of them, because they're often what leads to one or the other deal being chosen.

Now, there's uh, a place where I'd like you to go, which is S link here.

All right? So we're gonna talk about asset and stock deals, and you could call these equity deals.

Um, we're gonna talk about how they work and we're gonna talk about why you want do them from a commercial point of view.

And then bound up in that is all tax.

Uh, we're gonna spend about 45 minutes on that.

And then, um, if we end up finishing early, I might talk about deferred taxes.

And if we don't, then I'll probably just take questions at the end.

Um, we're gonna get into tax pretty quickly and spend most of the session talking about tax.

And so the session does come with a bit of health, health warning, which is that, um, tax is quite specific to country.

And so if this stuff's important to you, you've of course gotta check it yourself, you know where you're doing your deals, okay? Or where you think you're gonna end up working if you're not working yet.

Alright, I'm gonna drop in the link again and that will enable you to get to this page, which has our workouts, which we're gonna do together.

Um, let's get started then.

So firstly we're gonna talk about the outside and the inside basis, which is bit of jargon really.

Um, the outside basis is shares, the inside basis is assets.

And depending on what deal you're running or how you're running it, then you might look at the deal and say you're selling one or the other from a tax point of view.

And this forms a basis of the two types of deal we're gonna talk about, which is asset and equity deals.

If we take a look at a company, and so a random company, um, Volkswagen, nah, it's German, so it's not gonna come up with value, is it? No, I I can't get comp out it.

Okay, so let's go gm, general Motors. Okay? Now you can see, uh, gm, what we've got there is we've got the outside view of 58 billion in terms of equity.

And then we got the outside view of the operating assets being 167 billion there.

If we went a bit smaller, because you know, the idea of doing m and a activity on GM is a little bit outlandish. Who's gonna buy gm that mean a massive? So what happens if we go down to Harley Davidson instead? Okay, a bit more manageable.

Now you can see, uh, what have we got here? This millions. So we've got the equity weighing in at 3.5 billion.

That's the outside view.

So the assets of Harley Davidson on a net basis are worth 3.5 billion once all prior claims have been settled, I things like debt.

The inside view we could do by having a look at the balance sheet, okay? The inside view of, uh, Harley Davidson's assets, it's not quite as simple, but it, you know, here, total Harley docent incorporated shell's equity.

So you've got total equity here of 3.15 billion, And so can you see there's a huge gap between the inside and the outside view that's important and it will become important later as well.

Okay? Now that's inside and outside view.

Um, if you've got any questions, just jump in on the chat or put your hand up, whatever you wanna do. Otherwise, I'll keep going.

I'm also just gonna drop in that link again, if you're wondering why I keep doing that, it's because if you log in late, you don't see the history of the chat.

So I have to do it repeatedly, okay? Now, next what's gonna happen is, let's say we, um, buy a company.

We can buy a company on the inside basis.

IE we buy the assets, or we can buy a company on the outside basis.

IE we buy the equity.

Or in fact, if you're in America, you can buy on an outside basis, but elect to do the treatment of tax on an inside basis, which is your 3, 3 8 election, which we might talk about later.

So this gets quite complex.

It's important because the company and the shareholders are not the same.

So it is important to note that.

And so when we're dealing with a company and buying assets from the company, that's different to buying shares from the shareholders and has different tax consequences for the buyer and the seller.

And so it's gonna feed in, okay, let's talk about the two then.

So here we've got stock acquisition.

Right now we're gonna take control of the target and we're gonna do it through equity.

Okay? So the acquirer purchases shares in the target, the assets have not changed hands, and that might seem completely wrong on the face of it, but remember, the assets are not directly owned by the shareholders.

The assets are owned by the company, which are owned by the shareholders.

So you can sort of think about it like this.

You could say, here's the company, here's the shareholders of the company and here's the assets of the company.

Now, if you take the shares away from the shareholders, the assets have not changed hands.

This is the basis for a stock acquisition, okay? The shares take change hands, but the assets don't actually change hands. They're still owned by the company.

It's just the company now is owned by new shareholders.

So you could argue semantics and say, oh, well do you know the, the, the assets have changed hands? Fair enough? You could if you wanted to argue that, but that's not the way the tax person sees it.

Okay? Now why would you want to do that? Alright, well this is probably one of the big ones, okay? So an equity deal where you take control of the target through equity is relatively fast and admin light, okay? So why would you want to do it? It's because it's fast and it's admin light.

Alright? Let's talk about an asset deal, then we'll compare and that will make a lot more things clear.

So here's the asset deal.

Now here, instead of bidding on the shares to control the company and indirectly controlling the assets, you literally take the assets and say they are now mine, okay? And what you do is you hand the company cash to achieve that.

It's called an asset deal.

So the acquirer purchases assets in the target, okay? This is quite popular if you've got a division that you're gonna buy that's not wrapped in a company or maybe a set of assets that you want, where you wanna leave other assets or liabilities behind 'cause you don't like them.

The good thing about an asset deal is you can leave stuff behind.

So you can cherry pick sometimes called cherry pickling.

So if you suspect the target of having liabilities that you maybe are not aware of in one way of sidestepping that completely is by not controlling the target, but by controlling the assets you like.

So the trade, the machines, the locations, the shops, the factories, whatever you want.

Now, if you do an asset deal, you're bidding on the assets and you are bidding on the inside basis, okay? So the assets change hands and that has big tax impacts as we'll. See, the reason you like doing this is because it's easy to cherry pick.

It can also be tax beneficial, which you'll see later.

The problem you've got with an asset deal is that the admin is pretty heavy because if you imagine all those factories and cars and vans and you know, people, all of that has got to be retitled, as in all the contract works gotta be legally transferred to the buyer.

Where with a stock deal, that was relatively easy because the mechanism was just the transfer of the shares, everything flowed from that.

Okay? I did the session this morning and made a little summary, okay? Which it's strange, it's gone up. There we go.

Okay, so where we are now is about here, don't worry about the tax stuff yet.

So asset deals are slow admin heavy, they get cherry picking and there is tax benefit, but we don't understand that yet.

Stock deals are fast admin light, you can't cherry pick.

There are tax benefits for the buyer, but we don't understand that yet. That's what we're gonna do next. All right? I'm gonna stop now and see if there's any questions on the conceptual framework of asset versus, um, equity deals.

Before we start jumping into the number work.

You wanna wrote this stuff down here is it's about novels.

We haven't talked about that yet.

We might not talk about it.

All right? Just pausing, seeing if anybody's got any questions before we jump into the number work.

All right, let's go to this site then, and we'll do asset and stock deals, rework, empty.

Okay? So we're gonna grab asset and stock deals, rework, empty, and we're gonna work on that.

So I, I made this work out, I think I made it yesterday.

And the idea was that we put together some simple numbers, um, because I, I didn't wanna get lost in the numbers.

You can do these other workouts, which yeah, the, the, because I made this yesterday.

The, uh, the, the format hasn't come out brilliant.

But the idea is that these workouts here are a bit too complex.

We're gonna do this. Number two down here, which you should have just opened on.

You can see the numbers are really, really straightforward, okay? But what they do is they create a nice framework for discussion and teaching.

I'm getting lost in numbers, okay? So what we've got here is we've got some shareholders, and these are the targets shareholders, and they bought into the target at 300.

So this is their original purchase of shares or investment, okay? So they bought in at 300.

Now the acquirer offers and they've offered 500.

So you can see that there is a gain there, which we'll look at later.

There's a second potential gain that you can look at, which is that the assets from the balance sheet at one 50.

So this, there's nearly accounts.

So if you're running IRS, you are running gap, you know, this is what's on your accounts.

Now we've now got sort of three prices for the company.

We've got the money put in by the original owners as their investment or, um, you've got the, uh, the purchase price of the shares, um, you've got what the new acquirer believes the business is worth, and you've got what the assets are in the books at.

Now this is the least accurate in most companies, and that's because the, um, net assets on the balance sheet are usually held at cost and lots of assets are not really updated regularly.

And that means that the net assets on the balance sheet or the book value of equity as you could call it, is usually quite inaccurate, which a lot of this is revolving around.

All right? Now we also have a tax rate, and this is for everyone, and this is simplified.

Now, you can really poke holes in this work out and, and feel free to, and we can discuss that.

Um, I've tried to keep the numbers really simple.

Um, in the real world, you might have cross-border deals or you might have personal tax coming into this.

And so just saying 30% for everybody, it's not real, but these are numbers to teach from.

Okay? So here we go. Let's start bringing numbers together and see what the impacts are.

This is a stock acquisition.

The shares are being sold, shares are being sold for 500 where the original or purchase price was 300.

That means the shareholders are creating a gain of 200 tidy.

There we go. All right. Now the tax authority would get wind of that and, and charge 'em capital gains tax and say, right, you're, you are gonna pay, uh, 60, and that means that the target shareholders will walk away with 500 minus the tax, they'll walk away with four 40.

Now this is simple tax consequence.

They like that.

So the seller would be very pleased with this.

All right, let's hop over to the buyer. Okay? Now it says tax bases of assets after acquisition, right? So the assets have not been sold, the shares have been sold.

Remember, inside and outside basis in a stock acquisition, the assets have not been sold.

There's no value update, okay? Now that means that the tax authority looks at the assets and says they're worth 150.

That's because nobody's paid any tax on the asset sale yet.

Okay? I know we've paid tax on the shares, but that's, that's like different like category altogether.

So what the target's gonna then do as it gets folded into the acquirer, it's gonna get consolidated.

And then as part of the goodwill calculations, what you're gonna do is you're gonna update the value of the assets in your books.

Now you're probably gonna update that to something like the purchase price.

Again, that's a little bit of a simplification.

We're ignoring goodwill here, but I wanna keep the numbers really simple.

So if you wanna jump in and ask questions, feel free to, but otherwise we'll keep it really simple.

Alright, so we've got assets on our books that are worth 500, but the tax authority says, actually I regard them as being worth 150.

That means the tax authority believes that if you had to sell 'em tomorrow, you would make a 350 gain from the tax authority's point of view, that would actually be true.

So if tomorrow you sold all those assets, which would be very difficult to do, but just go with it, then you would make a 350 gain compared to what the tax authority has those on their books act.

And that means that the buyer would be on the hook for 1 0 5.

So this is an anticipated tax consequence to step up as we call it, which is a revaluation upwards.

But what we're saying is the buyer that responsible for, for the company level gain in asset, um, now this means the tax burden is on the buyer, and this is further evidence that from the seller's point of view, this is a good deal.

They like this, they get hit with one set of tax, the buyer has to pay another set of tax, but years down the line maybe, okay, it's quick, it's clean, and they take over the liabilities of the target.

So the the seller is not left with any, you know, dirty laundry hanging around, right? That's a stock deal. You need to understand that to be able to run the asset deal.

So feel free to ask questions here before you hop over to work out to, and the asset acquisition still typing, then keep going.

Okay, I'll, I'll continue, but if you've got a question, just keep typing and then hit enter and I'll interrupt my flow and answer your question or questions.

Now, let's hop over to the asset acquisition.

All right, we, we've still got the shareholders and they still bought in 300.

The bid now is on the assets, not the shares.

Okay? So it's still bidding, but now on the assets direct, I've kept the price the same.

We can talk about that later. We've still got the assets on the balance sheet at 150, okay? We've still got the tax rate at 30 and now we've got this extra thing that we'll do later, which is depreciation on the step up.

Okay? This we use later to figure out a kind of subtle advantage for the buyer.

All right? So the, the, the target company is sitting on assets worth 150.

The tax person sees this as a sale of assets and says, you sold the assets for 500, the tax person says to the target company, company, you have made a gain of 350 and you owe the tax person tax.

And so this will be paid by the target company company.

You know, I'm making a big deal out of this, but people get super confused, not shareholders.

Now remember, the target company is now left and the assets are being sort of reached in and grabbed out, okay? So the buyer has grabbed the assets they want and the target company now is potentially a hollow company.

Now let's imagine that the target company now has only cash, no assets because it's just hollowed out.

What's gonna happen is the company took 500 from the buyer but had to pay a tax bill of 1 0 5, which really did have to happen in the real world.

This isn't some sort of weird deferred tax for anything.

And so the, shes are now looking at an entity that has 3 9 5 in it, okay? What they do is they try and take the 3, 9 5 out, they liquidate the company potentially.

And what the tax person does is says, well, you've just taken 3 9 5 and you only put 300 in, so you've made a gain.

You shareholders are on the hook for a tax bill of about 28.

Now if you look at it, what's happened is the company now is able to pay out 3, 9, 5 to its shareholders once it collapses and is liquidated, but the shareholders then have a tax bill to deal with.

So they only actually sit on 3 6, 6 0.5.

And effectively what's happened here is we had the bid, the bid then got hit by a capital gains tax at a company level and got hit again by a gains tax at a personal level.

And then the value filtered down.

This is called double taxation.

Now, it's probably not the most professional way of saying it, but usually in the, in the context of corporate finance, if you hear somebody say double taxation, it's almost like somebody said, you've made a mistake here.

And I don't mean a mistake as in you've done your taxes wrong, okay? It, it's possible to get double tax and for the taxes to be correct.

Um, it's almost like saying you've seen as a tactical mistake, okay? Because double tax should be avoided.

The value that's coming in from the bid is being taxed twice, once at a company level and once at a shareholder level.

And so a disproportionate amount of money is going to the tax person.

Can you see the target shareholders who are walking away with four 40 in basically the same deal here, they're walking away with 3 6, 6 here.

Partly that's because they're the ones paying the game rather than the buyer down the line.

But partly it's because of the double tax problem, which is leaching value away to the tax authority in a way that could be avoidable perhaps.

All right? That's quite a lot to take in. The idea of double taxes, uh, can be challenging first time you see it.

So I'm gonna pause again and see if anybody's got any questions or wants me to repeat anything.

Okay? So let's keep going and now let's talk about the commercials a little bit.

Um, and then we'll talk about elections after that and see what time we got left.

So let's hop over to the buyer.

Now this was all action at the seller level and you can see they're, they're slightly grumpy about all of this.

Let's go to the buyer and see how they feel.

Now they take the assets and the assets have been sold, okay? So the assets have been sold and the tax person says, Hey, the assets have been sold.

So I see them as being worth 500 and this is very distinctive from what happened in the stock deal.

Now, the company would also have the assets in their books at 500.

And so if they sold them tomorrow, they would make no gain and they would be exposed to no tax.

So no down the road tax consequence, the seller has already paid tax on the gains and the assets and that means that from a buyer point of view, it's more attractive from a tax point of view.

Now this is a bit subtle and so feel free to jump in if I'm not making any sense and ask me to explain another way.

Alright? What we've got is we've effectively got an extra three 50, okay? So an extra three 50 because of our choice of deal, okay? So from a tax point of view, and let's just be really clear, is from a tax point of view, the assets are three 50 higher than they would have been under a stock deal because under a stock deal they would've been in the books at 150 from a tax point of view.

Now they're in the books at 500.

From a tax point of view, this isn't happening at a company level, this is at the tax authority and that means that they're gonna get what's called capital allowances.

That extra three 50 will depreciate over five years.

A normal accounting depreciation isn't tax allowable, but because the tax base has risen in this deal, you get extra tax allowable depreciation and you get 70 of extra depreciation every year which have been set against your profits at 30%.

And that means every year you're 21 better off than you would have been under the old deal overall over the entire course of the deal, you are 1 0 8, better off 1 0 5, apologies.

Okay, I wanna talk about commercials next, but understanding that 21 is important for the commercials.

So again, feel free to jump in if you've got comments, questions.

Okay, so let's review.

The seller had to pay all the tax basically and they paid the gains on shares and they eventually wound up the company and then even before that the company that they wound up had to pay the tax on the assets extra value.

And so far it's looking like a win-win win-win because the buyer also gets a tax base asset that's higher, gets to charge more tax allowable depreciation and gets a windfall.

So, so far it seems like a complete no brainer that all buyers would push for asset deals and all sellers would push for equity deals.

The thing is, like so many things in m and a, it's, it's really down to negotiation, okay? So the seller will probably push for a higher price, okay? The higher price will probably be equal for their extra tax billing or, or something like it. They'd probably say, look, you know, compared to an equity deal, can you see they are gonna get about 3, 6, 7, whereas over here they're gonna go about four 40.

So we could say, well you know, we're about 80 worse off so you better pay us 80.

And now you could say, well that seems like a good deal, like a win-win because the buyer is 105 better off because of the extra tax depreciation, capital allowances, Right? So you they could say, well that's fine, it's offset by the extra tax depreciation, but that's or of that is delayed and it may be delayed much longer than this.

It could be say 10 years or even 15.

And this is where we get into the idea of the time value of money again.

Okay? So there's quite a neat slide, okay, over here ignore all this 3, 3, 8 stuff. We'll come to that later. What we've got is the idea of the pain experienced by the seller, which is gonna mean that they want to up the price.

And then you're going to look at the PV of the tax shield, okay? And then you're gonna say, well, is the increased price worth it or does it bust the uh, negotiations? Alright, that's the core of asset versus stock deals.

I'm gonna pause there again, okay, you guys pretty quiet and that's okay.

I'm just saying that you know, you're absolutely fine to ask questions and I'm pausing every time.

Just give you a chance to start typing be hand up if that makes you feel happy or we could move on, okay? But I wanna give people a chance, okay? Now let's go back to our uh, summary here.

So you can see that asset deals are quite slow and admin heavy, okay? But they are tax beneficial to the buyer but they can annoy the seller because they can lead double tax.

So, so far it seems like you just end up with a lot of conflict.

If the buyer tried to push for an asset deal, you then got a stock deal which is nice and fast, okay? It is, it's um, a problem with no cherry picking tax beneficial for the seller, okay? Uh, you know, there's various other impacts.

So what if we could kind of cherry pick not the assets but some of the pros and cons.

Let's say we could do a deal which worked a bit like a stock deal in terms of being fast, okay, but was tax beneficial for the buyer and didn't lead to double tax, which is one of the main problems of some asset deals.

No, one of the problems, okay, so what if we could have the best of both worlds? Now if you're in America then you could do what's called a 3, 3 8 election.

Both parties volunteer for this and say, yeah, we, let's go for it. We're gonna do a 3 3 8.

And what it does is it says we're gonna do a stock deal mechanically, but we're gonna write a letter to the tax authority saying, I'd like for you to treat this as an asset deal.

That means mechanically it works as a stock deal.

So it is fast, but from a tax point of view it's an asset deal, but it's quite a clever asset deal because it avoids double tax.

And I'm not gonna get into why it's very detailed and what it does is it kind of converts things to what's called a pass through company.

If you're interested, ask a bit later, but we won't get into that now it's too much.

So you can elect and look, you might think, well why would anybody agree to this as the seller? Because you know, it seems to me like the buyer's just getting what they want then because they're getting a nice quick deal, but I pay all the tax.

So what's going on? You know, I'm the seller here.

It's almost like, you know, they, they've got me over a barrel or something.

It could be that the gain on the asset can be got rid of somehow by the seller.

They might not be as scared of it as our workout suggests.

Okay? So if we could have a nice fast deal, but you could effectively say, you know, this is gain of the asset.

Let's say it runs, runs at a 0% tax rate and can you see if you get rid of that and you turn it back into effectively the results of the stock deal.

So what you need is a clever way to absorb that hit within the target company.

And one of the ways that you can do that is you can use past losses, not the only way, but it's a good way.

Let's say the company was a target, you know, tech company and they've been running losses for a long time, the tax authority won't give them money, okay? What they'll do is they'll say, here's your losses account and when you start making money, gives a call and we, we will start using those losses and we'll carry them forward.

Now if you've got a big fat losses account because you've been loss making for a long time, then when the gain comes along, which is kind of analogous to that 1 0 5, I've made up a 300 here, you could set the gain against your knoll and it could just go away.

And so the target may not be as scared of the gain as you think and this would make a 3, 3 8 good.

It would also make a, just a regular asset deal, pretty good for the seller, much better than we've implied in our workout.

And so the dynamics of the deal and the ability to get rid of the tax is very important to uh, understanding which one's more attractive.

And if you're very observant you might say, well hold on, can't the buyer just take over the target and then use the nulls the same way? It could be a restriction on the nulls somehow, like some countries restrict them moving around in m and a or moving around in groups.

So you know, it could be complicated like all things tax considered.

Okay? So what we're gonna do now is start to summarize and then open up to questions.

So let's have a look here and we'll just go row by row and make sure we understand it all.

The tax person is gonna see a stock deal as based on the shares.

That means there's no interaction initially on the deal with the assets.

And that means the buyer is gonna end up paying for the assets upward valuation later when they sell them.

This means that you're gonna end up probably with deferred taxes.

Now the game in a stock deal will then be on the equity like modeled, whereas on an asset deal will actually be on the assets at a company level.

This could cause double tax, okay? Which is mentioned down here.

The assets are kept at the basic value under a stock deal unless you convert it to a tax asset deal under a 3 3 8 in America, okay? Because there's no step up, there's no additional amortization from a tax point of view unless you go over to an asset deal. Again, this is the good thing about an asset deal is you get to, uh, charge more depreciation against your taxable income tax depreciation. That is now stock deals cause deferred tax assets or liabilities, usually liabilities.

And they're a real painter model.

So if you do need to understand those more, I'll put you in the direction of some resources in a bit.

And then we've got a general preference, which is that the vendor generally wants a stock deal generally, okay? And the buyer generally wants an asset deal 'cause effectively they're pushing the tax towards each other at that point saying you deal with it, no, you deal with it, no, you deal with it.

And now of course this is negotiable because if you're pushing the tax one way, that party will adjust their price, uh, accordingly.

And part of this dynamic is not so much about who pays the tax, but who's best placed to pay the tax or avoid it.

Because if somebody's got some good way of absorbing these taxes or reducing them somehow that's something you can negotiate around and create value for both parties.

A little bit like synergies we've seen there are some more commercial or mechanical pros and cons, which are that you can leave liabilities behind in an asset deal, but it's slow.

Okay? What I'll do now is I'll point you in the direction of some good resources, I'll then start to probably wind down.

We're not gonna start anything new now, so we, we won't look at deferred taxes.

You can ask questions about 'em, but I'm not gonna do a workout now.

Um, so let me point in the resource direction and if you look at that and say I need to put together a, an advanced m and a model, um, which has deferred tax synergy due to step ups, then probably the first thing that you should do is you go to either valuation or accounting, both work and you go down and there are three or four yeah, specific tax modules, which would be useful to do to understand what deferred taxes are, how they appear on the balance sheet, how they move around, and how they affect models and valuations.

If you then say, actually instead of just understanding them on an abstract level, I wanna understand really how to model this.

So I'm creating an m and a model that has step ups in it because my m and a will be, you know, a stock deal with significant step up issues.

And what you can do is you go to investment banking.

Okay, go to m and a And it's one of these two, I always forget which one it is.

I think it's advanced.

Yes, this one. Okay.

So we call this one uh, bio Monsanto and this is our advanced m and a model.

And this model tracks deferred taxes through time.

So deferred tax is created by the uh, m and a step up.

And then what you can see is that evolving over time as it's depreciated away.

And what it does is it revises some of the ideas and those other modules and then goes further.

Okay? It actually shows a lot of that stuff through time and how it goes into a three statement model.

Alright, good. So we're a quarter two.

Uh, we've got some time now for questions, so stick around if you'd like to ask questions.

Um, if you are happy and you've got what you wanted outta the session, then I wish you a really nice day, uh, evening, morning, lunch, whatever you're at now.

Um, so if you're sticking around then great.

If you are going off, then I hope you have a nice, it is Friday, right? A nice weekend.

Hey, how we doing? How it, oh, which chin's just disappeared, we've put hand up and then disappeared.

Well, I've got a question there And if you wanna chat to me, we can, um, we're gonna unmute as well.

It's easier just to chat my microphone.

It's gone quiet for a bit, so I'm gonna start closing off the room.

Um, if you want my attention, just put your hand up or something. Otherwise I'll start slowly shutting things down.