futureyears.Note,though,thatanotheraccountingitemthat
accruesfromacquisitions,whichisgoodwill,doesnotyield
the same tax benefits, since amortization of goodwill is
generally not tax deductible.
3.Insomecountries,acquirersgetadditionalbenefitsthatare
relatedtotherestatedbookvalueofequityinthecombined
firm.InBrazil,forinstance,companiesareallowedtoclaima
rateofreturn(specifiedbythetaxauthorities)onbookequity
capital as a tax deduction (analogous to the interest tax
deduction).Assume,forinstance, thatthisspecifiedrate of
returnis 12 percentandthatthebookvalueofequityinthe
combinedfirmincreasesby$2billionafterthemerger.This
firm will be able to claim $240 million in additional tax
deductions in theyearafter themerger,and its value will
increase by the present value of the interest tax savings.
It should be notedthat mergers motivated entirely by tax
considerations carry a cost for taxpayers, who after all
subsidize these mergers.
ILLUSTRATION 15.5: Valuing a Net Operating Loss
Carryforward
Assumethat a firmwith expectedoperating income of $1
billion nextyearacquires a firmwith a netoperating loss
carryforwardof$1billion. Thecomputationofthesynergy
fromthisacquisitionisthesavingsintaxesthataccruetothe
acquiringfirm.Forinstance,withamarginaltaxrateof40%,
the savings in taxes this year (assuming that the tax
authorities willallow offsettingthe target firm’s operating
lossagainsttheacquiringfirm’sgain)is$400million.Thisis