TimbaBear, you're right to raise the question: and if, some time in the future, CMGI sells ENGA for "X" dollars per share....say, 126/share, would the IRS want this current treatment revisited?
At the time of CMGI's subsequent sale of ENGA shares, a taxable transaction (and one recognized for EPS purposes) would result.
Thought you might enjoy reviewing the 368(a) reorganization that CMGI used with AdForce, essentially resulting, for the moment, in a non-taxable event. I'm pretty certain they'll use a variant of this for the roll-up...
In the opinion of Hale and Dorr LLP, counsel to CMGI, and in the opinion of
Fenwick & West LLP, counsel to AdForce, the merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Internal Revenue
Code. Accordingly, subject to the limitations and qualifications referred to
herein, the following tax consequences will result:
. No gain or loss will be recognized by CMGI, AdForce or the transitory
subsidiary solely as a result of the merger.
. No gain or loss will be recognized by the holders of AdForce common stock
upon the receipt of CMGI common stock solely in exchange for such AdForce
common stock in the merger, except to the extent of cash received in lieu
of fractional shares.
. Cash payments received by holders of AdForce common stock in lieu of a
fractional share will be treated as capital gain (or loss) measured by the
difference between the cash payment received and the portion of the tax
basis in the shares of AdForce common stock surrendered that is allocable
to such fractional share. Such gain (or loss) will be long-term capital
gain (or loss) if such fractional share of CMGI common stock has been held
for more than one year at the effective time of the merger.
. The aggregate tax basis of the CMGI common stock so received by AdForce
stockholders in the merger, including any fractional share of CMGI common
stock not actually received, will be the same as the aggregate tax basis of
the AdForce common stock surrendered in exchange.
. The holding period of the CMGI common stock received by each AdForce
stockholder in the merger will include the holding period for the AdForce
common stock surrendered in exchange, provided that the AdForce common
stock surrendered is held as a capital asset at the effective time of the
merger.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in an AdForce stockholder recognizing gain
or loss with respect to each share of AdForce common stock surrendered in the
merger equal to the difference between the AdForce stockholder's basis in such
share and the fair market value, as of the effective time of the merger, of
the CMGI common stock received in exchange. In such event, an AdForce
stockholder's aggregate tax basis in the CMGI common stock received would
equal its fair market value, and the AdForce stockholder's holding period for
such stock would begin the day after the merger.
And as long as stock prices continue to hold their values in the marketplace, CMGI has certainly built a foundation that will produce greater amounts of earnings on the sale of its ownership interest in ENGA. More than would have been produced without the roll-up.
Mark |
