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Author: BaumgrenzeJohn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 4290  
Subject: HP Compaq Merger & HP Stock Basis Date: 7/31/2007 12:56 AM
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When Agilent was spun off from HP, there was a basis adjustment for shares of HP stock based on the ratio of the closing price of the two stocks on the day before the distribution date. The ratio for distributing the basis was 78/22. The new basis for HP stock was 78% of the value before the spinoff.

Did the merger of HP and Compaq have an impact on the basis for shares of HP stock held at the time of the merger, or was it really seen as a purchase of Compaq, just like the purchase of F&M or Mosley Recorders?

It is time I prepared a spreadsheet with proper basis values in it. I don't want to have to redo it because of Carley's merger.

thanks,

baumgrenze
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Author: rev2217 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3954 of 4290
Subject: Re: HP Compaq Merger & HP Stock Basis Date: 7/31/2007 12:17 PM
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baumgrenze,

When Agilent was spun off from HP, there was a basis adjustment for shares of HP stock based on the ratio of the closing price of the two stocks on the day before the distribution date. The ratio for distributing the basis was 78/22. The new basis for HP stock was 78% of the value before the spinoff.

Did the merger of HP and Compaq have an impact on the basis for shares of HP stock held at the time of the merger, or was it really seen as a purchase of Compaq, just like the purchase of F&M or Mosley Recorders?


Fundamentally, your total basis is what you paid, including commissions, for what you now have. No transaction ever changes your total basis, but certain types of transactions cause a change in the apportionment of that basis. For example, if a company splits its stock two for one, you have twice as many shares with half the basis per share to retain the same total basis.

Now, let's look at the specific transations described in your post.

>> The first transaction is a spin-off, in which you receive shares of a new company formed out of a business unit of another company that you own. In this case, both standard accounting practices (SAP) and, here in the States, the Internal Revenue Code (IRC) apportion the total basis in proportion to the value of the assets that you receive in the spin-off. In the Agilent spin-off, the shares of Hewlett-Packard (then NYSE: HPC) that you retained represented about 78% of the value and the shares of Agilent (NYSE: A) that you received represented about 22% of the value, based on the opening prices of both stocks on the first day of trading after the spin-off, causing the correponding apportionment of the basis. Your total basis did not change, but part of it went to the shares of the spin-off. Note that if you received cash in lieu of partial shares of Agilent, you should have deducted the portion of the basis allocated to those partial shares from the cash received to determine the capital gain (or loss) realized as a result of that transaction.

>> The second transaction is a merger in which Hewlett-Packard (NYSE: HPQ), the stock that you owned, happened to be the surviving ocmpany in spite of the change in its ticker symbol. Once again, your total basis did not change -- and neither did the apportionment since you held the same shares after the merger as before. Had you held Compaq (then NYSE: CPQ) shares at the time of the merger, which the merger converted to a different number of Hewlett-Packard shares, you also would retain the same total shares but the basis per share would have changed and, once again, you probably would have realized a capital gain or loss due to the difference between the basis apportioned to any partial shares of Hewlett-Packard to which you would have been entitled and the cash received in lieu thereof.

If you just remember that your total basis -- that is, what you paid for what you have -- never changes, the correct basis usually will be pretty obvious.

BTW, note that in all of these transactions, you MUST treat each purchase of shares separately for tax purposes. Also, the constructive date of purchase in the event of any of these transactions is the date that you made the respective purchase. Thus, suppose that you had 100 shares of Hewlett-Packard purchased on 10 Jan 1996, 100 shares purchased on 20 Mar 1998, and 100 shares purchased on 26 Apr 1999. You would now have three lots of Agilent with the same constructive purchase dates, probably include one or two shares that represent residual fractions from at least two of these lots. You also had the right, at the time of the spin-off, to designate from which of your lots you sold the fractional share for which you received cash in that transaction, but there's also a default specified by the IRC (I don't recall whether it's FIFO or LIFO) that applies automatically if you failed to make such a designation. Unfortunately, this makes the accounting a bit messy.

Norm.

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Author: BaumgrenzeJohn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3955 of 4290
Subject: Re: HP Compaq Merger & HP Stock Basis Date: 7/31/2007 1:58 PM
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Norm,

Thank you for as clear an explanation of all this as I have ever seen.

I hope it is of as much use to others searching the topic as it is to me.

My task is not trivial. The shares of HP were acquired by my wife through the HP ESOP between 1985 and 2000, when she became an Agilent employee. The supporting documentation from HP and Agilent is buried in a pdf file that is a one word link in a FAQ on the Agilent website. The Agilent/Verigy spin-off is much more clearly documented than the HP/Agilent spin-off.

Logic told me I could designate a portion of one lot of Agilent to cover the fractional share. In my records, all of the lots of Agilent are obviously fractional, being .238 x the shares in each lot of HP being held. Was I obliged to file a document with the IRS designating the shares, or do I just keep it in my records like my record of the basis for each lot of shares?

Thanks again,

baumgrenze

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Author: rev2217 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3956 of 4290
Subject: Re: HP Compaq Merger & HP Stock Basis Date: 7/31/2007 4:04 PM
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baumgrenze,

Thank you for as clear an explanation of all this as I have ever seen.

You're welcome!

I honestly don't know why people make this so complicated. It's really very simple.

My task is not trivial. The shares of HP were acquired by my wife through the HP ESOP between 1985 and 2000, when she became an Agilent employee. The supporting documentation from HP and Agilent is buried in a pdf file that is a one word link in a FAQ on the Agilent website. The Agilent/Verigy spin-off is much more clearly documented than the HP/Agilent spin-off.

The "Copy" and "Paste" functions will make this a lot easier than you think!

Was I obliged to file a document with the IRS designating the shares, or do I just keep it in my records like my record of the basis for each lot of shares?

No, there's nothing whatsoever to file. So long as you made the designation in your records at the time of the spin-off, there's no problem.

And actually, JTOL, the legal requirement to make the designation at the time of the sale is clear but I'm not sure how the IRS could prove that you did not do so if you actually made it when you filed your tax return for that year....

Norm.

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Author: BaumgrenzeJohn One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3957 of 4290
Subject: Re: HP Compaq Merger & HP Stock Basis Date: 8/6/2007 3:07 PM
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Hello again Norm,

Here's one more thought and/or question.

I spent the weekend reconciling ESOP statements from Harris Bank until Computershare took over from them.

In 1999 Harris stopped reporting the total basis and reported only the $/share for transactions. When I looked carefully I found that for previously reported transactions, the $/share, now reported only to two decimal places, was not rounded, but truncated. Shares that had been previously reported at $14.188/share were now reported at $14.18 (this example is for 5/5/89.)

From what you said before, I trust that you join me in finding this to be sloppy accounting work. Do you know if this is commonly done by other firms that manage company ESOP plans?

Thanks,

baumgrenze

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Author: rev2217 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 3958 of 4290
Subject: Re: HP Compaq Merger & HP Stock Basis Date: 8/6/2007 3:48 PM
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baumgrenze,

In 1999 Harris stopped reporting the total basis and reported only the $/share for transactions. When I looked carefully I found that for previously reported transactions, the $/share, now reported only to two decimal places, was not rounded, but truncated. Shares that had been previously reported at $14.188/share were now reported at $14.18 (this example is for 5/5/89.)

From what you said before, I trust that you join me in finding this to be sloppy accounting work. Do you know if this is commonly done by other firms that manage company ESOP plans?


I agree; it's very sloppy. Of course, the blame may well rest with the company's computer programmers rather than with the bean counters. And unfortunately, that sort of slop seems to be fairly typical of companies that manage assets for retirement and employee stock ownership plans. Of course, what they save on salaries for competent staff may well be what lets them undercut the competition when bidding for this work....

FWIW, I have not noticed problems of this type in statements from Charles Schwab & Co. (http://www.schwab.com) whom I use as a brokerage.

Norm.

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