Tax issues in mergers and acquisitions

With the pandemic accelerating the adoption of technology, many companies have capital to
invest. M&A as a growth strategy can help these companies win the race to own emerging
technologies, capture new opportunities, enhance current offerings, and cement market
leadership.
However, buyer beware: Maximizing value and cash flow amid fast-moving buying and
consolidation plans requires a comprehensive tax strategy as well as tax-focused analyses and
modeling of any potential deals.

What are the primary tax considerations around mergers and acquisitions?
A merger or acquisition may be a tax-free I.R.C. §368 reorganization or a taxable transaction
under the principles of I.R.C. §1001. There may also be state tax consequences from some types
of M&A transactions.
potential tax consequences of a merger or acquisition to a business entity and its owners –
and the complexity of the tax principles involved – dictate that one of the most critical aspects
of structuring such a transaction is tax planning.
The tax department provides the strategic analysis that informs and guides M&A decisions
and structuring. This includes reviewing the following through the lens of tax liability and the
impact on the cash flow and value of the merged business:
What is a corporate reorganization and how is it treated for federal income tax purposes?
As defined in I.R.C. §368, a corporate reorganization is a term of art used for federal income tax
purposes and encompasses various types of transactions, including:

 Acquisitions of assets or stock of one corporation by another

 Readjustments of capital structure of a single corporation
 The division of a single corporation into two or more entities
A reorganization must meet several statutory and common law requirements in order for the
participating corporations and their shareholders to avail themselves of favorable tax
treatment.
Recent mergers and acquisitions in the year 2021
On December 22, 2021, ZEEL announced their merger with and into SPNI. Sony will have a
stake of 50.86 per cent in the merged entity, and the founders of Zeel, the Essel Group, will
own a 3.99 per cent stake. Punit Goenka will head the company as CEO and the MD.

Tata Sons signed a share purchase agreement for buying Air India for Rs 18,000 crore. The
sale of Air India was a part of GoI’s strategic disinvestment plan.

On May 28, 2021, Tata Digital announced that they had acquired a majority stake in online
grocery seller BigBasket

. On April 5, 2021, BYJU’S, India’s leading ed-tech company, announced its strategic
partnership with Aakash Educational Services Limited (AESL), a leader in test-prep services. The
deal was pegged close to $1 billion, according to a person familiar with the transaction, as per
IANS.

On March 4, 2021, Wipro Ltd announced that they are buying British consultancy Capco for
$1.45 billion in cash, as the Indian software giant looks to boost its offerings for the financial
services industry that generates the bulk of its revenue, as per Reuters.
On June 10, 2021, Tata Digital Ltd purchased a majority stake in the online pharma startup
1MG at an undisclosed amount. Tata Digital earlier invested in similar startups like CureFit and
BigBasket.

On September 3, 2021, HDFC Life acquired a 100% stake in Exide Life Insurance from Exide
Industries via issuance of 8,70,22,222 shares at an issue price of Rs. 685 per share and a cash
payout of Rs. 726 crores, aggregating to Rs. 6,687 crores.

On March 31, 2021, Amazon Technologies paid $14.7 million(about Rs 107.5 crore) to acquire
Perpule in an all-cash deal. The company is likely to spend an additional $5 million (Rs 36.5
crore) or so to compensate Purple, as per IANS report.