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Hi, everyone! This is in response to Denis Dubois' questions on the
Sturgis paper. I'll try to be brief & non-boring.
If a company is not doing well, or it needs capital to expand, it may
prefer to be acquired. One option is to liquidate under Section
334(b)(2) and be purchased. Let's say assets are carried at $50
million. The acquirer may not unreasonably pay $100 million, which
might be based on an extra $35 million for the pv of future earnings on
current assets and $15 million for goodwill. The $85 million ($50+35),
as Lowe notes, may be derived from a Sturgis model. The goodwill is
just a negotiated intangible reflecting the value of the company's
agents, book of business, geographic area, whatever. In the hands of
the current corp., assets of $50 million will be depreciated gradually
to zero. But in the hands of the acquirer, those assets will be
depreciated starting at a much higher level, at $85 million. This is
important because depreciation is a non-cash charge (reduction) against
earnings, when calculating federal income taxes. So if I have a
profitable year, in the hands of the acquirer I can shelter more profits
and pay much lower corporate income taxes, than if the assets were in
the current corp.'s hands.
Rothman & Deutsch's point is trivial. Instead of considering the fact
that cash can earn interest or other investment income, they say, ignore
that, because it is implicitly considered in the discount rate used to
discount future cash flows. A stream of cash flows discounted at 8%
will be lower than 7%, reflecting the extra income one expects at the
higher level, so one does not have to separately project earnings from
cash already on the books.
I hope you find this helpful.
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