What is a tax step-up in an asset deal — and why does it make a valuation difference?
In an asset deal (unlike a share deal) the buyer acquires individual assets directly — not the company's shares. For tax purposes this steps up the asset bases to the purchase price (fair value at acquisition).
The buyer can depreciate/amortize the step-up for tax — typically over 15 years for goodwill and 5–15 years for other intangibles. This creates an additional tax shield that does not exist in a share deal (there the target's tax bases carry over unchanged).
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Calculation:
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Annual tax amortization: $100 ÷ 15 = $6.67m
Annual cash-tax saving: $6.67 × 30% = $2.00m
Total nominal tax shield (15Y): $2.00 × 15 = $30.00m
Tax shield on a PV basis: ≈ $20m
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On an equity-value basis, asset deals are worth roughly 10–20% more to the buyer than share deals — because of the tax shield. In an M&A negotiation the seller typically wants a share deal (simpler, fewer tax risks on the seller side), the buyer an asset deal (tax shield). What gets negotiated: an 'asset-deal premium' of typically 50–70% of the tax-shield PV, as a bridge between the parties.
'An asset-deal structure would generate a tax-shield PV of $18m; on a 50/50 split with the seller, the buyer's net benefit is $9m — which justifies raising the bid by that amount on otherwise equal terms'.