Conservative Corp. wants to acquire 100% of Risky Corp., and both of the corpora

Question

Conservative Corp. wants to acquire 100% of Risky Corp., and both of the corporations and their shareholders would like to structure this as a tax-free reorganization. In order to protect itself from liability for Risky's risky business, Conservative Corp. wants to make sure that at all times Risky Corp. stays a separate corporation, and that its assets or business activities are never in the same corporation as Conservative Corp. The current shareholders of Risky Corp. are satisfied to be paid in stock of Conservative Corp.

What basic form of acquisitive reorganization (A, B, or C) would you recommend, and why?

What additional recommendations might you make if it turned out that shareholders owing 10% of Risky Corp. stock want to receive cash for their shares in Risky Corp. rather than stock in Conservative Corp

Explanation / Answer

Answer )

Corporate houses restructure or reorganize for various reasons and by various methods. The main motive behind any reorganization of a company is to increase profits either by increase in market share or by synergy . Here the major motive behind reorganisation of Conservative Corp. and Risky corp. is to increase bottom line by use of tax incentives.

the best method to fullfillthe objective will be , Acquisition — Target Corporation Subsidiary, reorganization. Under this arrangement one company acquires all the stocks of another corporation, and the acquired company become a subsidiary. The reorganization must be completed in a short time , like in 12 months. The transaction create a voting right of share holders. In the such arrangement Conservative Corp will get the tax advantage , as the corp has to pay tax on its consolidated financial statements .

In case of sattlement process of 10% shareholders in Risky Corp in cash .

Conservative Corp should pay the amount in cash , which will provide benefits to the shareholders as

Conservative Corp should try to pay cash of shareholder by use of leverage , i.e by use of external debt .which not only reduce the immidiate cash liability but also increase the market credibility of firm.

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