Case 036Deal executionHard

A buyer can acquire a brand business as an asset deal and step up the tax basis, or as a share deal and inherit the old basis. How much is the asset deal worth to the buyer, and how should the seller's extra tax be shared?

Morgan StanleyHong Kong · 2025

The situation

A buyer has agreed to pay Rs 1,000 crore for Kovil Brands, a packaged staples business. The tax basis of Kovil's assets is Rs 300 crore. If the deal is structured as a purchase of assets, the buyer records the assets at what it pays and, for this case, can amortise the Rs 700 crore uplift for tax over 10 years at a 25% tax rate. If it buys the shares, the old basis carries over and there is no new deduction.

The seller's advisers estimate that the asset route costs the seller Rs 60 crore more tax than a share sale, for example because gains are taxed in the company and again when cash is passed to shareholders. The buyer discounts at 10%. Tax rules, rates and amortisation lives vary by country and change over time; the figures here are assumptions for the case, and the current rules should be confirmed with a tax adviser before relying on any of them.

Your task

How much more is the asset deal worth to the buyer, and what price should the two sides settle on?

Quick check

Roughly what is the step-up worth to the buyer today?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

The asset deal is worth about Rs 108 crore more to the buyer, against Rs 60 crore of extra tax for the seller, so it creates about Rs 48 crore to share. Amortising Rs 700 crore over 10 years saves Rs 17.5 crore of tax a year, worth Rs 107.5 crore today at 10%. The buyer can pay up to Rs 1,108 crore; the seller needs at least Rs 1,060 crore. A price near Rs 1,084 crore splits the gain evenly.

Step 1Why is buying the assets worth more than buying the shares?

Buy a second-hand car and the price you paid is your cost; buy the company that owns the car and you inherit whatever value the old owner had on its books. In an asset deal the buyer's tax basis becomes the price it paid, so the Rs 700 crore uplift over the old basis becomes a new deduction; in a share deal the old Rs 300 crore basis carries over and the uplift is never deductible. This step-upRaising the tax value of acquired assets to the price paid, which creates new depreciation or amortisation deductions for the buyer. is a cash benefit, not an accounting one: it lowers the tax the buyer actually pays every year.

Step 2What is the step-up worth in today's money?

Work it in three lines. Rs 700 crore over 10 years is Rs 70 crore of amortisation a year; at 25% tax that saves Rs 17.5 crore a year; and ten years of Rs 17.5 crore at 10% is worth Rs 107.5 crore today. The undiscounted total is Rs 175 crore, but the later savings are worth much less: the year 10 saving of Rs 17.5 crore is worth only Rs 6.7 crore today.

The relationship

PV = 0.25 \times \frac{700}{10} \times \sum_{t=1}^{10} \frac{1}{1.10^{t}} = 17.5 \times 6.1446 = 107.5

0.25	tax rate assumed for the case
700 / 10	yearly amortisation of the uplift
6.1446	ten-year annuity factor at 10%

What it says in wordsThe tax shield is the yearly tax saved, multiplied by the value today of receiving one rupee a year for ten years.

The asset deal saves Kovil's buyer Rs 17.5 crore of tax every year for ten years; discounted at 10% those savings are worth Rs 107.5 crore today, more than the Rs 60 crore of extra tax the seller bears.

Step 3How should the two sides share the gain?

Treat it as a negotiation over a surplus. The seller will not agree to an asset deal for less than Rs 1,060 crore, the share price plus its extra tax; the buyer is no worse off up to Rs 1,107.5 crore, the share price plus the shield; anything between the two leaves both better off. The surplus is Rs 47.5 crore. An even split puts the asset deal price at about Rs 1,084 crore: the seller is compensated for its tax and gains about Rs 24 crore, and the buyer keeps the same. In practice the split follows bargaining power: in a competitive auction most of the surplus goes to the seller.

An asset deal price between the seller's Rs 1,060 crore floor and the buyer's Rs 1,107.5 crore ceiling leaves both sides better off than a Rs 1,000 crore share deal; an even split of the Rs 47.5 crore surplus lands near Rs 1,084 crore.

Close with the limits, because tax is where interviewers check that you know what you do not know. Whether an uplift is deductible at all, over what life and at what rate, depends on the jurisdiction and on what the uplift is allocated to; in India, for example, the treatment of acquired goodwill has changed in recent years, so the current rules must be confirmed before the shield goes into a price. The buyer also takes a risk the seller does not: the shield is only worth Rs 108 crore if the business earns enough taxable profit to use it every year. And an asset deal is slower to execute, because contracts, licences and employees have to be moved one by one.

Where candidates lose it

The common loss is quoting the undiscounted Rs 175 crore, or confusing the Rs 70 crore deduction with the Rs 17.5 crore of tax it saves. The interviewer wants a present value, and wants to hear the tax rate applied to the deduction.

The second is forgetting the seller. An asset deal is not free value for the buyer; it shifts tax onto the seller, and the price has to move to compensate, so the real answer is a range, not a number.

What the interviewer asks next

What if the buyer could only use half the deductions in the first three years because of losses?
How does a share deal with a tax indemnity from the seller change the comparison?
Why might a seller with large carried-forward tax losses prefer an asset deal?
How would you show the step-up in a merger model?

Asked at Morgan Stanley, Investment Banking, Hong Kong, 2025 (Wall Street Oasis): Merger Model specifics and asset vs stock sale.

Company names and figures are illustrative.