Question

Assume instead that P&G acquired all of the stock of Gillette in exchange for $53 in cash per share and did not make a Section 338 election. Assume Gillette had 1 billion shares outstanding. Assume P&G issued bonds to raise the cash necessary to pay for the acquisition.

a. How much tax would the Gillette shareholders pay in the transaction? Assume for simplicity that all of the shareholders were taxable individuals facing long-term capital gains rates (15%) and had a tax basis in the stock of $40 per share.

b. If you were a Gillette shareholder, would you be better off with this all cash offer or the actual all stock offer? Why?

c. Would this structure affect the tax basis in Gillette’s assets relative to the all stock offer actually used? If so, by how much?

d. Why do you think that P&G and Gillette chose to structure the transaction the way they did rather than the taxable scenario above?

Answer 1

a) Tax basis of stock to Gillette Shareholders = $40 per share

Cash offer price by P&G = $53 per share

Long Term Capital Gain tax rate = 15%

Long term capital gain Tax = (53-40)*1000*15%=$1950 Millions

b) Yes Gillette Shareholder gains by $13 per share before tax. It is beneficial to take the cash offer from P&G

c)Yes, Exchange of shares 100% by P&G from Gillette shareholders affect the tax basis in the Gillette's assets to the extent of $13000 Millions due to capital gain

d) In regular Sec338 election Tax will be levied in the hands of Gillette Share holders on account of sale of shares and in the hands of Gillette company on account of sale of assets which results in tax levied 2 times on same transaction

Therefore to avoid that the transaction carried out by P&G and Gillette is beneficial to Gillette and its shareholders