Hypothetical facts involving structuring of a tax-free acquisition of XYZ corp.

XYZ Corp has a value of $200,000,000 and has a capital structure comprised of 200,000,000 issued and outstanding shares of common voting stock, so that the common voting stock immediately before the merger is worth $1 per share (value of $200,000,000, divided by 200,000,000 shares equals $1/share).

XYZ has 8,000,000 issued and outstanding shares of common voting stock, all owned by its founder, and 2,000,000 shares of Series A convertible preferred stock, convertible into 4,000,000 shares of common voting stock, all of the latter owned by its investor.

XYZ in an acquisition scenario can demand that the acquiring corp exchange 30,000,000 acquiring shares for all the XYZ shares. XYZ has been valued at $20,000,000, but if combining the two companies then it will result in $250,000,000 of aggregate value, and so "sharing" this created additional value will be a significant source of negotiating a tax-free acquisition.

XYZ investor is looking to cash out and the acquiring corp will view cash as scarce, therefore more valuable than issuing of additional shares. Shares that will be "paid for" through dilution of existing acquiring shareholders, while cash is always a scarce corporate resource. Therefore, the acquiring corp will pay more in an "all stock" acquisition than it will if some significant portion of the consideration is cash.

If the acquiring corporation pays out cash, its assets will be reduced by the amount of the cash payment, and presumably the math will have to be adjusted, e.g., the "value" of the post-merger entity may need to be reduced by the amount of the cash payment.This will affect how the remaining shareholders value their shares following the merger.

There are four acquisition structures to be considered in a typical tax-free (or partially tax-free) acquisition: (i) a "C" reorganization, (ii) a reverse triangular merger, (iii) a forward triangular merger (368(a)(2)(D)) or (iv) a transaction that qualifies for non-recognition under Code Section 351, either a single dummy or double dummy structure.

1. Which acquisition structure would serve the acquirer well? And why when it comes to a "tax free" acquisition under Code Section 368 or Code Section 351.

2. How much cash can the investor, initially seek and how much cash did could the investor end up with?

4. What is the estimated net value of the merged entity ($250M reduced by the cash paid to the investor)?

5. Using Code Section 351, what is the number of acquiring corporation shares [or the New co shares] issued to XYZ shareholders in exchange for their stock?

6. What is the new value per share for all acquiring corporation common stock [or New co common stock] immediately after the merger? (in other words the net value calculated under question 4, and divided by total shares issued to all shareholders.)

7. How can the $250 million of projected value of the merged entity be divided, i.e., how much value does the acquiring corporation shareholders get, how much does the investor get, and how much do the remaining shareholders of XYZ get?