YouTube, Twitch, and Cash

twitchtvSo rumor has it that YouTube may acquire Twitch. Rumor further has it that the acquisition price will be $1 billion. Cash.

Of course it’s cash, you say. What else could it be? 

Shares of YouTube. In fact, quite frequently,[fn1] one corporation acquires another by giving the shareholders of the target corporation shares of the acquiring corporationiTunesArtwork@2x

Sorry, force of habit. What I meant to say, in English:

If YouTube were to acquire Twitch in a stock deal, YouTube would give Twitch shareholders $1 billion of YouTube stock. In exchange, YouTube get all of the shares of Twitch.

In a stock deal, the shareholders of Twitch would be exposed to upside and downside risk. Specifically, if YouTube (not Twitch) increased in value, they would end up getting more money out of the deal; if it lost money, on the other hand, their sale price would go down.

A cash deal eliminates risk: they get $1 billion, whether the value of YouTube (or, for that matter, Twitch) ultimately goes up and down. The cash severs even an indirect interest in Twitch as an ongoing business.

But the taxes: in a properly-structured stock deal, no gain is triggered. The former Twitch shareholders essentially exchange their Twitch shares for YouTube shares, and, for tax purposes, nothing happens.

Not so in a cash deal. In a cash deal, the former Twitch shareholders will pay taxes on the difference between their cost in Twitch shares and the portion of the $1 billion they get from YouTube.

That is, by structuring the acquisition as a cash deal, Twitch shareholders don’t face any upside or downside risk. But they do face a certain (and probably sizable) tax bill.[fn2]

[fn1] (I’d say usually, but that would require me to do some research to back up my intuition and, given that this is a blog post, I’m not going to do the necessary research)

[fn2] So why structure it as a cash deal? This may be one of those situations where the business purposes outweigh the tax purposes. Assuming that Twitch shareholders have held their shares for longer than one year, they’ll be paying taxes at a maximum 23.8% rate in any event (that is, 20% long-term capital gain, plus a 3.8% net investment income tax). And, for all I know, some or all of the shareholders have capital losses they can use to reduce their tax burdens.

Or maybe they’re just going to be so rich that they don’t care.


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