Drilling Into Money Not Boring by Mark E. Battersby Timely, Ethical, and Profitable M&As It may sound callous but, because of the current state of the economy, now might be a good time to purchase or sell a distressed drilling business. After all, handled properly, mergers and acquisitions (M&As) allow the acquiring business to gain another operation that is a good fit under favorable terms and which might not otherwise survive. An M&A transaction can also mean helping a troubled business survive without the owners or shareholders completely losing what they’ve built up over the years. Equally important, an M&A can save the jobs of workers. In a basic share-exchange transaction, the buyer will exchange their shares for shares in the business being acquired. Paying with stock is advantageous for a buyer, especially if their shares are overvalued. Paying with cash is another, potentially expensive from a tax standpoint alternative. Unfortunately, smaller drilling businesses, without large cash reserves, usually require alternative, and expensive, financing to fund their cash transaction. Yet another popular alternative involves agreeing to take on the selling operation’s debt. After all, for many businesses, debt is the reason for the sale. Today, much of the risk in an M&A transaction can be eliminated with a special, and often-overlooked, type of insurance coverage. Warranty and Indemnity (W&I) insurance essentially removes the risk in a M&A transaction. With underwriters offering protection against downside risk, W&I insurance also eliminates the requirement for the use of escrow or personal guarantees while providing certainty and finality to both parties. When it comes to taxes, if two businesses exchange shares of stock in a merger, it rarely results in a tax bill unless, of course, “boot” is received. Boot is any consideration received by owners and shareholders in the target entity other than the buyer’s stock. Going one step further, the tax bill, even at the current low capital gain rate, is reduced if the acquisition or sale contract calls for payments spread over a period of time. It is a similar, no-tax, story when a business acquires control of another operation by assuming its debts. The coronavirus pandemic has had a significant impact on business in general and requires everyone to be realistic about how their business will perform in the new normal. The pandemic has also created a tremendous opportunity for M&A transactions where both acquiring and selling business can benefit. Naturally, expert tax and legal advice are strongly recommended. Mark Mark E. Battersby may be contacted via e-mail to michele@ worldwidedrillingresource.com 57 WorldWide Drilling Resource ® DECEMBER 2020
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