2 billion loss against future revenues

[jmkopp]

I know this has been discussed before, but is there any value to an acquiring company to use Mannkind's 2 billion dollar loss against the acquiring company's revenue?  Would it transfer to the acquiring company or not?  Could it be used to offset any of the acquiring company's revenues or maybe just offset future revenues from only the Mannkind assets.  Or maybe it can't be used at all.  Thanks!

[matt]

This is a very complex question, and you need to read Section 382 of the tax code to truly understand it, but the short answer is that the losses are for all practical purposes worthless unless acquired in a Type G reorganization under Section 368(a)(1), which in turn requires Mannkind to go bankrupt via Chapter 11. There is a provision to retain a very small portion of the loss to an acquiring company outside of bankruptcy, but it is very small and most acquiring companies don't both doing the math as it doesn't change what they are willing to pay.

As an example, Dendreon went bankrupt and sold their core business at auction for $400 million to Valeant and then, at the last minute, Valeant sweetened their bid by $10 million and restructured the deal as a Type G reorg.  That let them keep up all the tax losses and tax credits (Dendreon had over $2 billion in tax losses and about $70 in unused R&D credit).  Essentially, Valeant recovered more than 100% of their purchase price in tax benefits alone so the business was free; Valeant later sold the drug business onward for a nice profit and kept any still unused tax benefits for themselves.

None of that helps Mannkind shareholders.  There is one way the losses can benefit shareholders, but the shareholder group has to be organized and they have to have access to significant capital.  This is almost never the case in an insolvency situations, so unless somebody has deep pockets and the money to pay a law firm to structure it properly (think $5 million for starters) the losses have essentially no value that can help shareholders.

Anybody who tells you different doesn't understand how Section 382 works; I do.  My eyeballs bled for days after reading the associated regulations!

[jmkopp]

Thank you for the very thorough answer Matt. Although it wasn't exactly what I wanted to hear, I really appreciate your help!

[buyitonsale]

Looks like we are all in agreement.

If MNKD is acquired it would be about making a lot of money, not about writing off losses.

[matt]

Not sure what agreement we are in. If a company can acquire losses and credits with an economic value of $1 billion (give or take) then it significantly lowers the risk for them making an investment because that is $1 billion less they have to recover through future sales, or $1 billion more they can afford to pay. Economics doesn't care where the money comes from, just so long as it comes and you can't ignore a major source of value.

There was a booming business around 1980 where several companies (principally passenger railroads) were acquired precisely because they had tax losses, and the economic opportunity that provide allowed the acquirers to buy cash rich businesses because they would pay no taxes for many years. Congress decided that was an abuse, which is why Section 382 was passed as part of Reagan's tax reforms. The aforementioned bankruptcy exception was added back during the dark days of Detroit as a favor to the automobile unions when GM was facing bankruptcy; until that happened the losses were just gone.

[prosper]

I believe there is another option.
If MNKD buys another company that has high profits and needs tax write offs they could use the accumulated losses. MNKD obviously has no finances to do this normally, and I don't know if the IRS will use the old rule "if the transaction is only to avoid taxes it is no good". However, if MNKD could find a company that would lend them the money to purchase a 3rd profitable company MNKD could make it worthwhile to the lender or buy in capital supplier.

[Cowgirl]

Apr 28, 2017 7:03:36 GMT -5 matt said:

Not sure what agreement we are in. If a company can acquire losses and credits with an economic value of $1 billion (give or take) then it significantly lowers the risk for them making an investment because that is $1 billion less they have to recover through future sales, or $1 billion more they can afford to pay. Economics doesn't care where the money comes from, just so long as it comes and you can't ignore a major source of value.

There was a booming business around 1980 where several companies (principally passenger railroads) were acquired precisely because they had tax losses, and the economic opportunity that provide allowed the acquirers to buy cash rich businesses because they would pay no taxes for many years. Congress decided that was an abuse, which is why Section 382 was passed as part of Reagan's tax reforms. The aforementioned bankruptcy exception was added back during the dark days of Detroit as a favor to the automobile unions when GM was facing bankruptcy; until that happened the losses were just gone.

Matt...but your first comments in this tread imply that the only way to acquire the tax loss is via a Chapter 11.  So, as you attested, shareholders most likely get 0 in that scenario.   So, YES an acquiring company can earn economic value by tax loss and credits but it will do nothing for current mannkind shareholders.