The Effect of Taxes on the Structure of Corporate Acquisitions

Abstract

This paper analyzes tax and non-tax determinants of corporate acquisition structure for 340 acquisitions involving public U.S. acquirers and targets during 1985-1988. The results indicate that the acquiring firm's tax and non-tax characteristics significantly affect transaction structure, but the data provide almost no support for the conclusion that potential target shareholder capital gains tax liabilities or target firm tax and non-tax characteristics influence acquisition structure. Detailed analyses of the magnitude of tax and non-tax costs and benefits indicate that built in target shareholder capital gains are not large on average and target shares turnover quickly indicating that the benefits of tax deferral are modest; expected acquiring firm shareholder wealth losses associated with a tax-free stock merger exceed the tax benefits derived from preserving target firm NOLs in most transactions; and the immediate tax cost of stepping-up the basis of the target's assets often exceeds the future tax benefits from such a structure.

JEL Classification: H25, G34