5. Why didn't WorldCom try to structure the transaction to get a "step-up" in the tax
ases of MCI's assets (given the large difference between the purchase price and the
, book value of equity of MCI)?
4. Why do you think that WorldCom proposed the structure it did?
3. Why do you mink GTE proposed the structure that it did?
2. How much more in tax deductions from goodwill amortization would GTE get than\
WorldCom given the proposed structures? How much do you estimate is the present'*
value of these tax deductions?
2009 Merle Erickson
44 Cases in Tax Strategyf
i
^
Comparison of the Structures:m
1. Assuming that GTE offered the same amount of consideration per share of MCI
stock, how much of a tax saving or tax cost would MCI's shareholders realize from
taking the GTE offer instead of the WorldCom offer? Use your estimates from
questions #4 above.
i
'Source: THE BATTLE FOR MCI: THE SHAREHOLDERS; Anatomy of a Bid: Less From GTE
May Mean More, New York Times By FLOYD NORRIS, 10/16/97 (Section D; Page 1).
Terms of the Various Acquisition Offers for MCI
as of October 16, 1997*
British Telecom offer:
$36,875 total consideration (Cash and Stock)
($7.75 cash plus 0.375 BT shares)
Worldcom offer:
$41.50 total consideration (all Worldcom Stock)
•' XXXXXXXXXXshares of WorldCom stock for each share of MCI stock,
Worldcom stock valued at $ XXXXXXXXXXper share)
GTE offer:•"••••-• •^ ;;^: .5;;: ;:t;;..^^. :
$40.00 total consideration (100% Cash)
Some FACTS about the deals' values that may not be apparent from
the case:^
•BT deal valued at $26 billion. ^
•GTE deal valued at $28 billion. ^^i ^: ^ ^
•WorldCom deal valued at about $30 billion.
•The shares that would be purchased do not tie to the total shares on
WorldCom's financial statements, thus the deal values above don't
tie to the per share amounts multiplied by the total MCI shares
outstanding per the financial statements.
^a^ Strategy 45
(c) Tax Opinion. MCI shall have received the opinion of Simpson
Thacher & Bartlett, counsel to MCI, to the effect that, on the
asis of the facts, representations and assumptions set forth in
such opinion, (i) the Merger will be treated for Federal income tax
purposes as a reorganization within the meaning of Section 368(a)
of the Code, (ii) each of MCI, BT and Merger Sub will be a party to
that reorganization within the meaning of Section 368(b) of the
Code and (iii) no gain or loss will be recognized on the exchange
of shares of MCI Common Stock for the Merger Consideration, except
that gain, if any, shall be recognized to the extent of the Cash
Consideration received, which opinion shall be dated on or about
the date that is two Business Days prior to the date the Proxy
Statement/Prospectus is first mailed to stockholders of MCI and
which shall not have been withdrawn or modified in any material
espect as of the Closing Date. The issuance of such opinion shall
e conditioned on receipt of representation letters from each of
MCI and BT. The specific provisions of each such representation
letter shall be in form and substance satisfactory to Shearman &
Sterling and Simpson Thacher & Bartlett, and each such
epresentation letter shall be dated on or before the date of such
opinion and shall not have been withdrawn or modified in any
material respect as of the Closing Date.
© 2009 Merle Erickson
...for United States Federal income tax purposes, it is intended that
the Merger shall qualify as a reorganization under the provisions of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"Code") and that this Agreement constitute a plan of reorganization
within the meaning of Section XXXXXXXXXXg) of the income tax
egulations promulgated under the Code.
Item 5. Other Events
On November 3, 1996, MCI Communications Corporation, a Delaware
corporation (the "Company"), entered into an Agreement and Plan of
Merger (the "Agreement") with British Telecommunications pic, a
public limited company incorporated under the laws of England and
Wales ("BT"), and Tadworth Corporation, a Delaware corporation and a
wholly-owned subsidiary of BT ("Tadworth"), pursuant to which the
Company will merge with and into Tadworth (the "Merger"). As a
esult of the Merger, each outstanding share of the Company's common
stock, par value $.10 per share (other than shares held in the
treasury of the Company or owned by BT or Tadworth or any persons
who shall have properly exercised their rights to appraisal unde
Delaware law), will be converted into the right to receive (i) 0.54
American Depositary Shares ("ADSs") of BT, each representing ten
ordinary shares of 25 pence each of BT (with cash being paid in
lieu of fractional ADSs), and (ii) $6.00 in cash. The combined
company will be named Concert pic and will operate under the BT and
MCI
and names in the United Kingdom and the United States,
espectively.
46 Case^ /n 7
British Telecom Data From its November XXXXXXXXXXK:
© 2009 Merle Erickson
Cases in Tax Strategy 47
WorSdcom Merger Structure Data from WorldCom^s 424A filed
10/14/1997:
WorldCom, Inc., a Georgia corporation ("WorldCom"), hereby offers, upon the
terms and subject to the conditions set forth in this Prospectus (the
"Prospectus") and the accompanying Letter of Transmittal (collectively, the
"Offer"), to exchange shares of common stock, par value $.01 per share, of
WorldCom (the "WorldCom Common Stock") for each outstanding share (each, a
"Share") of common stock, par value $.10 per share (the "MCI Common Stock"), of
MCI Communications Corporation, a Delaware corporation ("MCI") (including the
shares of MCI Common Stock into which the outstanding shares of Class A common
stock, par value $.10 per share, of MCI (the "Class A Common Stock") would be
automatically converted in accordance with the provisions of MCI's Restated
Certificate of Incorporation upon the tender of such shares pursuant to the
Offer), together with the associated prefe
ed stock purchase rights (each a
"Right" and, collectively, the "Rights") issued pursuant to a Rights Agreement,
dated as of September 30, 1994, between MCI and Mellon Bank, N.A., as Rights
Agent, as amended (the "MCI Rights Agreement"), validly tendered on or prior to
the Expiration Date and not properly withdrawn. The holder of each Share validly
tendered on or prior to the Expiration Date and not properly withdrawn will be
entitled to receive that number of shares of WorldCom Common Stock equal to the
Exchange Ratio. "Exchange Ratio" means the quotient (rounded to the nearest
1/10,000) determined by dividing $41.50 by the average of the high and low sales
prices of WorldCom Common Stock as reported on The Nasdaq National Market (the
"WorldCom Average Price") on each of the twenty consecutive trading days ending
with the third trading day immediately preceding the Expiration Date; provided,
that the Exchange Ratio shall not be less than XXXXXXXXXXnor greater than 1.2206.
Accordingly, each Share will be exchanged for WorldCom Common Stock having a
market value of $41.50 if the WorldCom Average Price is between $40.00 and
$34.00. If the WorldCom Average Price is greater than $40.00, each Share will be
exchanged for WorldCom Common Stock having a market value of more than $41.50
and, conversely, if the WorldCom Average Price is less than $34.00, each Share
will be exchanged for WorldCom Common Stock having a market value of less than
$41.50. Cash will be paid in lieu of any fractional shares of WorldCom Common
Stock. On, the closing price of WorldCom Common Stock as reported
on The Nasdaq National Market was $ . Based on a WorldCom Average Price equal
to that amount, each Share would be exchanged for WorldCom Common Stock having a
market value of $ . The actual WorldCom Average Price and Exchange Ratio will
e calculated as of the third trading day immediately prior to the Expiration
Date, as described above, and a press release will be issued announcing the
actual Exchange Ratio prior to the opening of the second trading day prior to
the Expiration Date (as it may be extended from time to time). Unless the
context otherwise requires and unless the Rights are redeemed, invalidated o
inapplicable to the acquisition of Shares pursuant to the Offer and the Merge
(as hereinafter defined), all references to the Shares shall include the
associated Rights.
© 2009 Merle Erickson
According to the Original BT/MCI Proxy Statement/Prospectus, a MCI
stockholder exchanging Shares for Concert ADSs and cash would realize gain
measured by the excess, if any, of (i) the sum of the amount in cash and the
fair market value of the Concert ADSs received over (ii) such stockholder's tax
asis in the Shares, which realized gain will be taxable to the extent of the
cash received. ACCORDINGLY, EVEN IF THE MARKET VALUE OF THE REVISED BT
ACQUISITION PROPOSAL WERE EQUAL TO THE MARKET VALUE OF THE OFFER,
MCI STOCKHOLDERS WOULD RETAIN MORE VALUE UNDER THE OFFER BECAUSE
OF ITS TAX-FREE NATURE.
VALUE OF COMBINED COMPANY'S STOCK FOLLOWING THE TRANSACTION. As noted
above, the Offer provides a substantial premium to holders of Shares compared to
the Revised BT Acquisition Proposal. However, MCI stockholders should also
consider the prospects of the combined company that would result from each
proposed transaction in assessing the likely value of each prospective combined
company's stock after a combination with MCI. WorldCom believes that MCI
stockholders would be better positioned to realize higher returns in the future
through ownership of a WorldCom/MCI combined entity than through ownership of a
BT/MCI combined entity. The Offer and the Merger are expected to be accretive to
WorldCom's earnings by as much as 22% in the first year after closing with
synergies of approximately $2.5 billion in the first year, growing to
approximately $5 billion in the fifth year. These synergies are expected to
esult from better utilization of the combined network and other operational
savings. Because WorldCom has already established extensive domestic local
network facilities, a WorldCom combination with MCI is expected to achieve
significantly higher synergies than possible under the Revised BT Acquisition
Proposal. See "-Synergies" and "Cautionary Statement Regarding Forward-Looking
Statements" below.
FEDERAL INCOME TAX CONSEQUENCES. The Offer is structured to be tax-free to
holders of Shares, while the Revised BT Acquisition Proposal would result in
holders of Shares being taxed on gain from the exchange to the extent of the
cash received. In the opinion of Bryan Cave LLP, special counsel to WorldCom,
exchanges of Shares for WorldCom Common Stock pursuant to the Offer and the
Merger, as described below, should be treated for federal income tax purposes as
exchanges pursuant to a plan of reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
Consequently, no gain or loss should be recognized by holders of Shares upon
such exchanges, except with respect to the receipt of cash