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Here is the description of the deal.

Under the terms of the agreement, each share of Guidant common stock will be exchanged for $30.40 in cash and $45.60 in Johnson & Johnson common stock, provided the average Johnson & Johnson common stock price is between $55.45 and $67.09 during the 15-day trading period ending three days prior to the transaction closing. Each Guidant share exchanged would be converted into Johnson & Johnson common stock of not more than .8224 and not less than .6797 shares, plus $30.40 in cash.

To simplify, assume I have shares of GDT holding more than 1 year, with cost basis at $50 per share, and assume deal will go through at $30.40 cash + .7 share JNJ @65 per each share, i.e. within the specified collar.

1) How $30.40 will be treated for tax purpose? If it needs to be taxed, how is cost basis be calculated? Should it be proportionally derived from original cost basis, i.e. 50 * 30.40/76?

2) What is the cost basis for JNJ shares obtained through transaction? Is it 50* 45.60/76?

Thanks,

Bin
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http://www.guidant.com/investors/jnj_info.shtml

Q. What are the mechanics for shareholders to exchange their shares?
A. After the merger is completed, the exchange agent will send a letter of transmittal to each former Guidant stockholder. The transmittal letter will contain instructions for exchanging shares of Guidant common stock for cash and shares of Johnson & Johnson common stock as provided in the Merger Agreement. </i?

You should receive, shortly after the dust settles on the merger, information on how to handle the transaction. I have never been involved in a stock plus cash merger or acquisition so I can't be of more help, but, in any case, you must follow the direction provided which includes IRS treatment.

Bob

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Each merger stands on its own and has its own rules. What follows is a general rule that often holds in cash + stock mergers.

First you have to determine the total value received for your GDT shares. This will be the sum of the cash received and the value of the JNJ shares. Compare this amount to your cost basis in GDT to determine whether you have a gain or loss.

Since you know you're getting $76 in value for each of your GDT shares and you're stating that your cost basis is $50/share, you have a gain of $26/share.

You will report the lesser of the calculated gain ($26) or the cash received ($30.40) as a taxable gain on the transaction. In this case, you would report $26/share as gain. What about the other $4.40 cash you received? This is a return of capital which reduces your basis in the GDT shares to $45.60.

Now you make the exchange in which you get x shares of JNJ for each share of GDT. Your cost basis per share of JNJ is $45.60/x.

Finally, since you will probably receive a non-integral number of shares of JNJ, you will probably sell the fractional shares of JNJ for some (to be determined) amount. This will also be a reportable capital gain/loss transaction.

Here are the other scenarios:

If your GDT basis were $40/share, you would have a gain of $36/share and would be receiving $30.40/share in cash. The lesser of the cash received or gain (cash in this case) is reported as a capital gain. Your entire cost basis of GDT ($40/share) is transferred to the fractional share of JNJ you receive. Your cost basis per share of JNJ is $40/x. The sale of any fractional share will be a reportable capital gain/loss transaction.

If your GDT basis were $80/share, you would have a loss on the transaction. You would reduce your cost basis in GDT by the cash received ($30.40) giving a new cost basis of GDT of $59.60. This cost basis transfers over to the fractional share of JNJ. Your cost basis per share of JNJ is $59.60/x. The sale of any fractional share will be a reportable capital gain/loss transaction.

Hope this helps. After the deal closes and you get the official documentation from GDT/JNJ come back and ask questions if something isn't clear.

Ira



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Thanks Ira for very useful information. I was thinking totally in the wrong direction. Anyhow, looks like large amount of capitol gain can not be avoided in such cash + stock deal. With that in mind, it's probably wise to plan early to reduce the impact on AMT this year.

Also consider another scenario:

At the time of merger, JNJ price is higher than the specified collar upper boundary, say $75 (You never know, it's already close to $70 as of today). One GDT share exchanges for 30.40 + .6797 JNJ @$75. As such, the value increases to 81.38. So the gain should be reported as the less of 81.38-50=31.38 and 30.40, i.e. 30.40. The basis of .6797 JNJ is based on market value, i.e. 50.98. Am I right?

Also, do you know how the options will be affected through such cash+ stock merger in general? Thanks.

Bin
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At the time of merger, JNJ price is higher than the specified collar upper boundary, say $75 (You never know, it's already close to $70 as of today). One GDT share exchanges for 30.40 + .6797 JNJ @$75. As such, the value increases to 81.38. So the gain should be reported as the less of 81.38-50=31.38 and 30.40, i.e. 30.40. The basis of .6797 JNJ is based on market value, i.e. 50.98. Am I right?

Could be. Terms of a merger can always be different if outside the collar region.

Also, do you know how the options will be affected through such cash+ stock merger in general? Thanks.

No idea. They will be adjusted in some fashion so that each investor's option holdings represents a consistent value of stock.

Ira
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Also, do you know how the options will be affected through such cash+ stock merger in general?

Once the merger is completed (and the exchange ratio is known), the Guidant contracts would be adjusted to reflect the cash consideration and the exchange ratio.

For example, if the exchange ratio turns out to be .7525, each Guidant contract would be adjusted to require the delivery or receipt of $3,040 cash + 75 shares of JNJ + cash in lieu of .25 fractional shares of JNJ. The strike price and expiration date would remain the same.

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In my previous post I was assuming, perhaps incorrectly, that you were asking about exchange-traded options (calls and puts), not employee stock options.

If it is the latter that you are interested in, the Proxy statement that the company will mail to will have a detailed discusion of this.

kh

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