points. ABC Corporation is very interested in acquiring App Annie Corporation. A
ID: 2798253 • Letter: P
Question
points. ABC Corporation is very interested in acquiring App Annie Corporation. ABC processes and packages seafood items. App Annie supplies ABC with the seafood. ABC has been trying to negotiate a merger with App Annie’s management but has been unsuccessful. App Annie’s executives, who own 15% of the outstanding common stock, are concerned about losing their jobs after the merger. However, it appears that the majority of App Annie common shareholders feel this merger would increase the value of both firms. ABC currently owns 25% of App Annie that it acquired 10 years ago for cash. MPC has asked for your advice as to how to proceed. Suggest an effective method for MPC to acquire App Annie with the least tax cost.
Explanation / Answer
Solution:
The acquisition could be set up as a “Type B” reorganization. ABC Corporation can acquire the 60% of the outstanding common stock not owned by the executives directly from the shareholders by exchanging ABC Corporation voting stock for App Annie Corporation stock. In this manner, ABC Corporation can bypass trying to negotiate with App Annie Corporation management. With the previously acquired 25% of App Annie Corporation stock, ABC Corporation will now own 85% of the stock and therefore meet the 80% control requirement for a “Type B” reorganization. The fact that the previously owned 25% was acquired with cash does not violate the solely voting stock consideration requirement.
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