If You Don’t Buy It, M&A Outlook is Still Solid

Last week, CVS announced that it would be buying OakStreet Health for $10B, which comes on the heels of buying Signify Health in the Fall for $8B.  Even with rates continuing to climb, the M&A market remains solid.  Reasons range from consolidating market share, catching up on delayed deals from 2022, taking advantage of existing financing availability that’s at pre-Fed rate increase levels and valuations that are getting back to more realistic levels.  If you don’t buy it (pun intended), take a look at what some of the major deal advisors say:

• PwC 2023 Global M&A Industry Trends Outlook
• 2023 M&A Outlook: 4 Trends as Deals Pick Up | Morgan Stanley
• M&A in 2023: A Complex but Optimistic Outlook for Deal-Making (goldmansachs.com)
• Looking Ahead to M&A in 2023 | Bain & Company

So, what does that mean for you as a business owner or leader?  To start, I thought it would be good to revisit the basics of an acquisition and then provide some strategies that you might consider.    For the next few weeks, we will cover the core concepts that may spur some thoughts on the M&A landscape.

Asset Transaction
Most of the transactions in the privately held business sector are asset transactions.  The Buyer purchases just the assets of the Seller’s business.  From a tax perspective, the Buyer will typically get a step up in basis on the value of the assets purchased, which helps with depreciation and amortization expense.  The Seller, on the other hand, would be subject to both capital gains and ordinary income rates, depending on the mix of hard assets and intangible assets.

Stock Transaction
Stock transactions still do occur in the privately held business sector.  Typically, these are done if the Seller has certain contracts with their customers that would have to be rebid in the event of an asset sale (i.e., the Selling entity must remain in existence post transaction).  The Seller may also have some tax attributes which make it attractive (e.g. tax loss carry-forwards).  From a tax standpoint, these are typically more advantageous for the Seller because the stock is subject to capital gains rates.  The Buyer on the other hand typically does not get as much of an advantage because they are only buying the stock and the asset values of the Seller remain on the books as normal (i.e., no step up in basis).

Merger
In a merger, two separate entities merge together (or merge their assets together) and form a new entity.  From a tax perspective, mergers present a lot of different scenarios.  I could write about all them in this update, but I think they are a good topics for the coming updates.

If you are saying to yourself:  Asset Sale, Stock Sale, Merger…..my head hurts!  Don’t worry, your business professional advisors (business accountants, business attorneys, business financial advisors, etc…..and yes, I meant to add business in front of each profession) can help with the process.

A few other items of interest this week:

• Key Takeaways From President Biden’s State of the Union Address – SAX LLP – Advisory, Audit and Accounting
• CO—  Strategy Studio: Navigating Tax Season (uschamber.com) 02/23/23 @ 12pm EST
• Solutions InSight – Solving for Success in a Changing Economy (eisneramper.com) – 02/23/23 – 1pm EST

As always, please don’t hesitate to email myself (jsanders@mpl-law.com), Andy Miller (amiller@mpl-law.com), Christian Miller (cmiller@mpl-law.com), Erik Spurlin (espurlin@mpl-law.com), Brad Leber (bleber@mpl-law.com) or anyone in our office with questions or comments.  

Please see all of our prior updates at this link or if you would like to be added to our email list, please click here.