The Valuation of Tax Shields Induced by Asset Step-Ups in Corporate Acquisitions

Abstract

We derive discount rates for depreciation and amortization tax shields resulting from asset step-ups in corporate mergers and acquisitions. By assigning all relevant sources of uncertainty for such tax shields and by accounting for corporate debt it is shown that for APV valuations r*, a rate between the firm's cost of debt and the risk-free rate, is adequate to discount step-up induced depreciation benefits. When the benefits are valued on a standalone basis, the adequate discount rate is the after-tax weighted average of r*. Discount rates for these shields have been determined arbitrarily in empirical research on corporate acquisitions so far. However, they are found to be in line with the rates deduced in this paper.

Characterization and Analysis of Cooperative Mergers and Their Results

“…Johnson () calls the last assets redundant or non‐operating assets , defined as those that are not required in the ongoing operations of a business and which can be extracted from the business without impairing its ability to generate prospective discretionary cash flows as forecast. The second factor is the book revaluation of assets that can be undertaken in the merger, permitted by accounting legislation up to a maximum of the market value or selling price (Groh and Henseleit ) in mergers that use the acquisition accounting method. This situation has been analyzed in studies such as Kaplan () or Erickson and Wang (), who point out that the post‐merger accounting results are affected, as the higher values assigned to assets imply higher depreciation costs (Apellániz et al ).…”

Las Combinaciones De Negocio en El Cooperativismo Agroalimentario Español: El Caso De Las Fusiones. Análisis De Sus Factores De Éxito Y Fracaso

“…Johnson ( 2001) calls the last assets redundant or non-operating assets, defined as those that are not required in the ongoing operations of a business and which can be extracted from the business without impairing its ability to generate prospective discretionary cash flows as forecast. The second factor is the book revaluation of assets that can be undertaken in the merger, permitted by accounting legislation up to a maximum of the market value or selling price (Groh and Henseleit, 2009) in mergers that use the acquisition accounting method. This situation has been analyzed in studies such as Kaplan (1989) or Erickson and Wang (2000), who point out that the postmerger accounting results are affected, as the higher values assigned to assets imply higher depreciation costs (Apellániz et al, 1996).…”