David S. Pan

Living Better and Working Smarter.

Category: Business (page 1 of 5)

What is an investment?

You sacrifice something of value now, expecting to benefit from that sacrifice later.

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Bulletpoints on Leadership

Leadership: the process of providing general direction and influencing individuals or groups to achieve goals.

Trait Theory of Leadership:
+ Drive
+ Leadership motivation
+ socialized power motive: to achieve goals that are in organization’s best interests
– personalized power motive: solely for power over others
+ Integrity
+ Self-Confidence
+ Cognitive Ability
+ Knowledge of the Domain
+ Openness to new experience
+ Extraversion

Behavioral Theories of Leadership

University of Michigan Studies
~ job-centered leadership style: a behavioral leadership style that emphasizes employee tasks and the methods used to accomplish them.
~ employee-centered leadership style: a behavioral leadership style that emphasizes employees’ personal needs and the development of interpersonal relationships

Ohio State University Studies
~ Initiating structure: a behavioral leadership style demonstrated by leaders who establish well-define patterns of organization and communication, define procedures, and delineate their relationships with those being led.
~ Consideration: a behavioral leadership style demonstrated by leaders who express friendship, develop mutual trust and respect, and have strong interpersonal relationships with those being led.

Contingency Theories of Leadership

Fiedler’s Contingency Theory of Leadership Effectiveness: a theory of leadership that suggests that the effectiveness of a leader depends on the interaction of his style of behavior with certain characteristics of the situation.

Leader Style: consider the esteem for the lease-preferred co-worker (LPC) to determine if the leader is task-oriented [low LPC] or relationship-oriented [high LPC] style

Situational Characteristics:
~ Leader-member relations: the degree to which a leader is respected, is accepted as a leader and has friendly interpersonal relations.
~ task structure: the degree to which tasks can be broken down into easily understood steps or parts.
~ position power: the degree to which a leader can reward, punish, promote, or demote individuals in the unit or organization.

Martin Evans’ Path-Goal Leadership Theory: a theory of leadership based on expectancy concepts from the study of motivation, which suggests that leader effectiveness depends on the degree to which a leader enhances the performance expectancies and valances of her subordinates.
~ expectancy: perceived probability of goal attainment
~ valences: value or attractiveness of goal attainment

Directive Leadership: guidelines, setting standards, ensuring people follow the rules
Supportive Leadership: friendly and showing concern for well-being, welfare and needs
Achievement-oriented Leadership: setting challenging goals and seeking improvement
Participative Leadership: sharing info and consulting with follower and emphasis on group

Transformational Leadership

transactional leadership: a leadership approach that is based on the exchange relationship between followers and leaders. Transactional leadership is characterized by contingent reward behavior and active management-by-exception behavior [defined as behavior demonstrated when a leader clarifies minimal performance standards and punishes those who do not perform up to the standards.]

transformational leadership: a leadership approach that involves motivating followers to do more than expected, to continuously develop and grow, to increase self-confidence, and to place the interests of the unit or organization before their own. Transformational leadership involves charisma, intellectual stimulation and individual consideration.

+ charisma
+ intellectual stimulation
+ individual consideration

  • opposite of transformational leadership: laissez-faire or passive-avoidant leadership

Additional Leadership Theories

Leader-Member Exchange: a model of leadership focused on leaders developing more positive relationships with some individuals and having more positive exchanges with these individuals.
+ an associate contributes at a high level
+ an associate similar to the leader

Servant Leadership: an approach to leadership focused on serving others.

Gender Effects on Leadership
structural-cultural model: a model holding that because women often experience lack of power, lack of respect, and certain stereotypical expectations, they develop leadership styles different from those of the men.
socialization model: a model proposing that all leaders in a particular organization will display similar leadership styles, because all have been selected and socialized by the same organization.

Note: a very complex subject with differing research results with no conclusive evidence pointing to either model above.

Global Differences in Leadership
[research called GLOBE conducted by U.S. National Science Foundation, headed by Robert House]

Anglo Cluster: The ideal leader demonstrates charismatic influence and inspiration while encouraging participation. Ideal leaders are viewed as being diplomatic, delegating authority and allowing everyone to have their say.

Arabic Cluster: The ideal leaders need to balance a paradoxical set of expectations. On one hand, they are expected to be charismatic and powerful but on the other, they are expected not to differentiate themselves from others and to have modest styles. They are expected to have power and to direct most decision and actions.

Germanic Cluster: The ideal leader is one who is charismatic and participative and who conceptualizes her relationships in a team-like fashion.

Southern Asia Cluster: The ideal leader is humane, participative and charismatic. Leaders are expected to be benevolent while maintaining a strong position of authority.

Source: Hitt, M. A., Miller, C. C. & Colella, A. (2011). Organizational Behavior 3rd Edition. Hoboken, NJ: John Wiley & Sons

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Bulletpoints on U.S. Merger & Acquisition Tax Consequences

Acquisition Transaction Structure from Buyer’s Perspectives:
Ownership: Acquiring Corporation’s Majority Shareholders, Acquiring Corporation, and/or Parent Corporation
Purchase Target: Seller’s Stocks and/or Assets
Funding: Acquiring Corporation’s Stocks, Cash and/or Debt.

Seller’s U.S. Tax & Risk Concerns:
Receiving Cash: Fully or partially taxable. Risk is minimal.
Receiving Acquirer’s Stocks: Tax-deferrable. Risk of future fluctuating stock valuation.

U.S. Acquisition Tax Model:
~ Assets: Purchase assets from seller with any type of consideration
~ Stock: Purchase stock from shareholders with any type of consideration.
~ Assets: Type A reorganization using at least 40% Buyer’s equity
~ Stock: Type B reorganization using only Buyer’s equity.

U.S. Buyer’s General Preferences:
1. Prefers to acquire target corporation’s assets in a taxable transaction for “stepped-up” tax basis in the assets equal to FMV(cost), for full purchase depreciation/amortization.
2. Prefers NOT to engage in tax-deferred acquisition, requiring to take a carryover basis in the goodwill, as the goodwill tax basis will be 0 and no amortization will result.

U.S. Seller’s General Preferences:
1. Prefers to sell stock, in a taxable or tax-deferred transaction, so the gain recognized is taxed at lower capital gain tax rate.
2. Prefers to sell assets in a tax-deferred transaction.

Taxable Acquisition Types:
1. Cash Acquisition for Assets: (+) Buyer (-) Seller
A. Buyer provides cash to buy assets: Inventory (Ordinary), Building (Ordinary §291 & §1231), Land (§1231), Customer List (§1231) and Goodwill (§1231).
B. Seller pays a corporate-level tax on gains.
C. If Seller liquidates the corporation, shareholders receive remaining cash, recognize long-term capital gain (LTCG) and pay shareholder-level tax at 15%.
D. Buyer depreciates and amortizes assets, including the customer list and goodwill.

2. Cash Acquisition for Stocks: (-) Buyer (+) Seller
A. Buyer provides cash to buy Seller’s shareholders’ stocks.
B. Buyer may opt to liquidate target or merge it into an existing subsidiary.
C. Seller’s shareholders pay LTCG 15% tax.
D. Buyer can not amortize goodwill or customer list and needs to retain existing carryover tax basis, not FMV, to depreciation.

  1. §338 Election to treat the stock purchase as a deemed asset purchase: (~) Buyer (~) Seller
    A. It is treated as if the Seller sells its assets and repurchases at agreed FMV.
    B. Seller recognizes gain on assets that have appreciated in value but Seller’s overall FMV reduces due to the tax liability.
    C. Buyer gets “stepped-up” tax basis on assets’ FMV.
    C. Strategy only applicable if Seller has net operating losses or net capital losses to offset such gain.
  2. Buyer and Seller Joint §338(h)(10) Election: (+) Buyer (+) Seller
    A. Assuming that the Seller has a parent company.
    B. Seller’s parent company reports the gain from the deemed sale of assets on the parent company’s tax return.
    C. Buyer amortizes and depreciates the “stepped-up” tax basis.

Tax Deferred Acquisition Types
Applicable IRC: §368 of 1986
[Case: Walt Disney Company acquiring Marvel Entertainment with 40% Stock & 60% Cash]

~ Assumption: Seller’s shareholders will retain Continuity of Interest (COI)

~ Assumption: Continuity of Business Enterprise (COBE): The acquired company’s (Seller’s) historic business and assets must be continued or used in significant manner. Does not apply to the acquiring company’s (Seller’s) historic business or assets. Hence, Buyer can reorganize the acquired business and sell it without violating the COBE requirement.

~ Assumption: Business Purpose Test: The transaction must show business or corporate purpose and a significant non tax avoidance purpose, per Supreme Court’s ruling in Gregory v. Helvering, 293 U.S. 465 (1935).

§368 Asset Acquisitions
Type A: Statutory Mergers or Consolidations, per §368(a)(1)(A).
~ Statutory merger: Party A transfers Party A’s stocks to Party B, in exchange for Party B’s stocks. Party A assumes Party B’s liabilities and inherits seller’s assets.
~ consolidation: Party A and Party B transfer assets and liabilities to a newly formed entity in return for stock in the new entity.
Tax Benefit: defers gain or loss recognition
A. Both Parties’ shareholders’ tax basis in the stock received is a substituted basis (gain tax-deferred) of the stock transferred.
B. Both Parties’ assets remain at their carryover (historic) tax basis.
C. If one Party’s shareholders receive cash or properties (boot) other than the exchanged stock, the shareholders need to recognize the gain amount that is the lesser of the gain realized or the boot received.

Type A: Forward Triangular Type A Merger
~ not commonly used by public companies.
A. Buyer creates a subsidiary corporation that holds Buyer’s stock.
B. Seller merges into Buyer’s subsidiary with Seller’s shareholders receiving Buyer’s stock in exchange for Seller’s shareholders’ stock.
C. Buyer is required (in additional to straight Type A req’s) to acquire “substantially all” [(90%+) Seller’s FMV of net properties and 70% of FMV of Seller’s gross properties] of the Seller.
D. Seller’s assets and liabilities are then held by Buyer’s subsidiary, making it available to dissolve Seller’s corporate existence.

Type A: Reverse Triangular Type B Merger
[Case: January 2006: Walt Disney acquired Pixar using this method.]
~ Applicable Scenario: if Seller has contracts and licenses that can not be easily transferred.
A. Buyer creates a subsidiary corporation that holds Buyer’s stock.
B. Buyer’s subsidiary merges into Seller’s company, exchanging Seller’s shareholder stock for Buyer’s stock.
i. Seller must hold “substantially all” of the properties of both Seller and Buyer’s subsidiary.
ii. Seller’s shareholders must transfer in the exchange of at least 80% of Seller’s stock.
iii. At least 80% of Seller’s shareholders’ stock must be exchanged for Buyer’s voting-class stock.
C. Seller becomes a wholly owned subsidiary of Buyer, preserving Seller’s corporate existence.

Type B: Stock-for-Stock Reorganizations
A. Party A acquires control (80%+ ownership) of Party B with Party A voting stock
B. No other cash or property can be used in this transaction
C. Party A takes a carryover basis in the Party B stock received.
D. Party B’s shareholders will defer recognition of any gain or loss realized and take a substituted basis in Party A’s stock.
Simple strategy but rarely used in public companies because:
– requires calculating thousands of shareholders’ tax basis for their shares
~ IRS can allow acquiring company to determine its stock basis using statistical sampling

Type C: Merger
~ Similar to Type A except that Type A is governed by state law, whereas Type C is governed by Internal Revenue Code.

Type D: Divisive vs. Non-divisive Type D Merger
~ non-divisive Type D: Party A transfers all or part of its assets to Party B and Party A shareholders own at least 50% of Party B’s voting power or value of Party B.
~ divisive Type D: similar to non-divisive scenario except that 50% is increased to 80%+.

Type E: Recapitalization
~ Stock in a corporation is exchanged for a different class of stock or securities (i.e. preferred, debt, etc.), ranging from amendment in corporate charter to a change in the redemption price or liquidating value of stock to an actual exchange of stock between the corporation and its shareholder(s).

Type F: Reorganization
~ mere change in identity, form or place of organization

Type G: Bankruptcy Reorganization
~ In a Title 11 case, Party A transfers all or a part of its assets to Party B and the stock of Party B is distributed in a transaction that is tax-deferred.

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