Lbos are relatively common and some have been quite

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LBOs are relatively common, and some have been quite large. For example, one of the largest cash acquisitions in history (and possibly the single largest private transaction ever of any kind) was the 1989 LBO of RJR Nabisco, the tobacco and food products giant. The acquisition price in that buyout was an astonishing $30.6 billion. In that LBO, as with most of the large ones, much of the financing came from junk bond sales (see Chapter 5 for a discussion of junk bonds). Alternatives to Merger Firms don’t have to merge to combine their efforts. At a minimum, two (or more) firms can simply agree to work together. They can sell each other’s products, perhaps under different brand names, or jointly develop a new product or technology. Firms will frequently estab- lish a strategic alliance , which is usually a formal agreement to cooperate in pursuit of a Got the urge to merge? See . com and www. mergernetwork.com for ideas.
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5 joint goal. An even more formal arrangement is a joint venture , which commonly involves two firms putting up the money to establish a new firm. For example, Verizon Wireless is a joint venture between Verizon Communications and Vodaphone. 2 1 . 2 TA X E S A N D A C Q U I S I T I O N S If one firm buys another firm, the transaction may be taxable or tax-free. In a taxable acqui- sition , the shareholders of the target firm are considered to have sold their shares, and they will have capital gains or losses that will be taxed. In a tax-free acquisition , the acquisition is considered an exchange instead of a sale, so no capital gain or loss occurs at the time of the transaction. The general requirements for tax-free status are that the acquisition be for a business purpose, and not to avoid taxes, and that there be a continuity of equity interest. In other words, the stockholders in the target firm must retain an equity interest in the bidder. The specific requirements for a tax-free acquisition depend on the legal form of the acquisition, but, in general, if the buying firm offers the selling firm cash for its equity, it will be a taxable acquisition. If shares of stock are offered, the transaction will generally be a tax-free acquisition. In a tax-free acquisition, the selling shareholders are considered to have exchanged their old shares for new ones of equal value, so that no capital gains or losses are experienced. The capital gains effect refers to the fact that the target fi rm’s shareholders may have to pay capital gains taxes in a taxable acquisition. They may demand a higher price as compensation, thereby increasing the cost of the merger. This is a cost of a taxable acquisition. 2 1 . 3 A C C O U N T I N G F O R A C Q U I S I T I O N S Prior to 2001, when one firm acquired another, the bidder had to decide whether the acquisition would be treated as a purchase or a pooling of interests for accounting pur- poses. Through the years, a great deal was written on the two approaches, discussing their pros and cons. This issue was made moot in 2001 because the Federal Accounting Standards Board (FASB) eliminated the pooling of interests option. We discuss both
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  • Spring '12
  • Scott
  • Firm, Firm B

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