The Effect of Taxes on Acquisition Price and Transaction Structure

Abstract

The purpose of this paper is to investigate the effect of the target's tax status on the structure of taxable corporate acquisitions. Specifically, we examine how the taxes imposed on the parties to the transaction are shared. Our results suggest the acquirer bears target tax costs through higher acquisition prices. In addition, our results also suggest that the acquirer pays little, if anything, to the target for the use of target net operating losses. Finally, we find that the target's tax status affects the transaction structure since targets with higher marginal tax rates are more likely to desire contingent payments in the contract.