Outright Purchase Of Smithon Case Study

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You Decide Week 6 S Corporations Keller School of Management AC533 Federal Taxes and Management Decisions Professor Daniel Louviere 1. Outright purchase of Smithon stock: a. Should Mr. Jones purchase the stock of Smith outright, leaving Smithon intact? What about issuing debt in his Johnson Services company to pay for the Smith Company – would that raise debt to equity issues? No, Mr. Jones should not purchase the stock. A stock purchase would mean that you will acquire the whole company. Which means you will inherit the assets of the company along with inheriting the liabilities as well. If there are jobs that need to be completed or contracts that were set in motion before you purchased the company, you would still be responsible…show more content…
Should Mr. Jones merge Johnson Services with Smithon? What type of merger or acquisition would be best (i.e., A type, etc.)? Yes, a Type A reorganization which is a merger would be best for this acquisition. A merger can be accomplished without the use of cash. A type A merger would increase market power which would increase market share. Increase in market share would increase profitability. A merger is also recommended because with Smithon’s positive income can offset with Johnson’s negative income and would result in reduced tax liabilities. A merger redefines the business world which allows for improve corporate business strategies and philosophies along with stronger alliances and less competition. There are many reasons for a merger but the most important is to maximize its profits. There are 4 different types of Mergers are: Horizontal merger, Vertical merger, Co-Generic merger, Conglomerate merger. I feel that the merger between these two corporations is a conglomerate merger since one company is in the service industry while the other is in the manufacturing industry. A conglomerate merger takes two industries that are different and combine their operations to improve their operations and competitiveness. Conglomerate Merger: Conglomerate merger is a kind of venture in which two or more companies belonging to different industrial sectors combine their operations. All the merged companies are no way related to their kind of business and product line rather their…show more content…
Jones decides to buy Smithon Corporation he should buy it with the exchange in stocks instead of buying the Corporation outright. This will lower his acquisition cost and in return lower his taxable income since there is no recognition of a gain or loss on an acquisition company with a stock-for-stock exchange. If he decides to buy Smithon Manufacturing he will be able to change it to and S Corp and follow the fiscal year ending on December 31st. By changing it to an S corporation he will have the profits go directly to his personal income and avoid double taxation. A merger would best be used in this situation since it will help lower his taxable income and he can improve his operations and competitiveness. If he feels that the investment in new manufacturing equipment will help increase profits and can take on the extra liability, then he should buy Smithon. His debt –to-equity ratio will rise and may cause him to have a hard time getting money to finance his company. But with a two year loss he is keeping his taxable income down and may be able to show investors that things are going to turn around when all operations are working together and
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