BigCo has decided to acquire Upstart Corporation, a leading supplier of a new technology believed to be crucial to the successful implementation of BigCos business strategy. Upstart is a relatively recent start-up firm, consisting of about 200 employees averaging about 24 years of age. HiTech has a reputation for developing highly practical solutions to complex technical problems and getting the resulting products to market very rapidly. HiTech employees are accustomed to a very informal work environment with highly flexible hours and compensation schemes. Decision-making tends to be fast and casual, without the rigorous review process often found in larger firms. This culture is quite different from BigCos more highly structured and disciplined environment. Moreover, BigCos decision making tends to be highly centralized.

While Upstarts stock is publicly traded, its six co-founders and senior managers jointly own about 60 percent of the outstanding stock. In the four years since the firm went public, Upstart stock has appreciated from $5 per share to its current price of $100 per share. Although they desire to sell the firm, the co-founders are interested in remaining with the firm in important management positions after the transaction has closed. They also expect to continue to have substantial input in both daily operating as well as strategic decisions.

Upstart competes in an industry that is only tangentially related to BigCos core business. Because BigCos senior management believes they are somewhat unfamiliar with the competitive dynamics of Upstarts industry, BigCo has decided to create a new corporation, New Horizons Inc., which is jointly owed by BigCo and HiTech Corporation, a firm whose core technical competencies are more related to Upstarts than those of BigCo. Both BigCo and HiTech are interested in preserving Upstarts highly innovative culture. Therefore, they agreed during negotiations to operate Upstart as an independent operating unit of New Horizons. During negotiations, both parties agreed to divest one of Upstarts product lines not considered critical to New Horizons long-term strategy immediately following closing.

New Horizons issued stock through an initial public offering. While the co-founders are interested in exchanging their stock for New Horizons shares, the remaining Upstart shareholders are leery about the long-term growth potential of New Horizons and demand cash in exchange for their shares. Consequently, New Horizons agreed to exchange its stock for the co-founders shares and to purchase the remaining shares for cash. Once the tender offer was completed, New Horizons owned 100 percent of Upstarts outstanding shares.

Questions:

To acquire Upstart Corporation which is the acquisition vehicle used? Why was this legal structure used?

What is the form of payment? Why was it used?

What was the form of acquisition? How does this form of acquisition protect the acquiring companys rights to HiTechs proprietary technology?

How would the use of purchase accounting affect the balance sheets of the combined companies?

Was the transaction non-taxable, partially taxable, or wholly taxable to HiTech shareholders? Why?