The Financial Viability of Reverse Morris Trusts
Open Access
- Author:
- Salunkhe, Om
- Area of Honors:
- Finance
- Degree:
- Bachelor of Science
- Document Type:
- Thesis
- Thesis Supervisors:
- Stefan M Lewellen, Thesis Supervisor
Brian Spangler Davis, Thesis Honors Advisor - Keywords:
- Reverse Morris Trusts
Morris Trusts - Abstract:
- The purpose of this paper is to more deeply understand the broader implications of Reverse Morris Trust (RMT) transactions. Existing research cites that RMT transactions are “very complicated as they involve what is essentially a carveout/subsidiary sale, spin-off and public company merger all in one negotiated transaction” (Glaccum & Donnelly 2018). Notably, this transaction type is executed in a completely tax-free manner, making it a very appealing prospect for large companies today. The paper will include discussions around the advantages of such transactions, the specific 1966 court case which initially introduced the RMT deal structure, the tax code within the IRC that allows this transaction to take place, and will ultimately evaluate historic RMT transactions to consider their financial viability. The data aspect of this paper is centered around using 36-month pre-announcement returns to calculate abnormal returns for the Parent and RMT Partner companies involved. Ultimately, after performing statistical tests on these returns and comparing their significance, I attempt to determine whether RMT transactions are value-creating for the Parent, RMT Partner, both, or neither. Effectively, this analysis is conducted to better understand whether RMT transactions produce long-term financial benefits for the shareholders involved. In conclusion, statistical analyses showed that RMTs appear to be value-creating for both Parent and RMT Partner companies. Interestingly, the value created by RMTs does not seem to be systematically different for Parent companies vs. RMT Partners, for larger deals, for deals where the seller keeps a large stake, or for deals involving debt.