You Might Not Have Wanted This Benefit From The MHS ESRX Merger

Laurie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investment clubs which use bivio for their record keeping, owned Medco Health Solutions (UNKNOWN: MHS.DL).  They received their shares when it was spun off from Merck (NYSE: MRK) in 2003.  Recently (April 2, 2012),  Medco was acquired by Express Scripts (NASDAQ: ESRX).  If you were an owner of Medco, you received $28.80 cash plus .81 shares of ESRX for each of your Medco shares.  You also received some 2012 tax consequences.

As described in the prospectus, in a cash plus stock merger, if you had a gain on the buyout, you will have to recognize either long term or short term capital gains this year.  The amount of taxable gain on each lot of Medco shares that you held is determined this way:

1.     Calculate the amount of any gain

At a closing price of $55.50 for ESRX shares on the date of the merger, the total you received for each share of Medco stock was:

$28.80 + (.81 x $55.50) = $73.76

Subtract your total basis in each lot from the total number of shares multiplied by $73.76.  For example, if you owned a lot of 100 shares with a cost basis of $1000, your gain would be:

(100 x $73.76) - $1000 = $6376

If you owned the lot for one year or less, this will be a short term capital gain.  If you owned it for more than a year, it is a long term gain. If you had a loss, you cannot claim it or use it to offset any gains.

2.    Compare the gain to the amount of cash received

If you had a gain,  you will be taxed in 2012 on the amount which is less than or equal to the amount of cash you received.  If you received cash in excess of the amount of the gain, it is considered a return of capital and will be used to adjust the basis in the ESRX shares you received. 

In the example above, you would have received 100 x $28.80 = $2880 in cash.  Since that is less than the total gain calculated of $6376,  the total taxable gain for 2012 is $2880.

3.   Determine your basis in the ESRX shares you received:

The final basis of each lot of ESRX will be your basis in your original Medco shares, plus any gain you need to recognize in 2012 and minus any cash you received.

To finish the example started above,  for your 100 MHS shares, you received 81 shares of ESRX.  The new basis in those shares is:

$1000 + $2880 - $2880 = $1000 

If you owned multiple lots of Medco, you have a series of calculations to do to determine your total short term and long term gains and the basis of each new lot of ESRX shares.  Here's an example of the calculations one club needed to do:


<table> <tbody> <tr> <td> <p><strong>Date</strong></p> </td> <td> <p><strong>MHS Shares</strong></p> </td> <td> <p><strong>Tax Basis</strong></p> </td> <td colspan="2"> <p><strong>Long Term /<br />Short Term</strong></p> </td> <td> </td> <td> <p><strong>MHS Capital Gain Dist.</strong></p> </td> <td> <p><strong>MHS Return of Capital</strong></p> </td> <td> </td> <td> <p><strong>ESRX Shares</strong></p> </td> <td> <p><strong>Cash</strong></p> </td> <td> <p><strong>Total Value Received</strong></p> </td> <td> <p><strong>Gain (Loss)</strong></p> </td> <td> <p><strong>ESRX Shares Tax Basis</strong></p> </td> </tr> <tr> <td> <p>8/28/2003</p> </td> <td> <p>24.00000</p> </td> <td> <p>$329.40</p> </td> <td> <p>LT</p> </td> <td> </td> <td> </td> <td> <p>$691.200</p> </td> <td> </td> <td> </td> <td> <p>19.44000</p> </td> <td> <p>$691.200</p> </td> <td> <p>$1,770.120</p> </td> <td> <p>$1,440.720</p> </td> <td> <p>$329.400</p> </td> </tr> <tr> <td> <p>11/20/2003</p> </td> <td> <p>40.00000</p> </td> <td> <p>$699.20</p> </td> <td> <p>LT</p> </td> <td> </td> <td> </td> <td> <p>$1,152.000</p> </td> <td> </td> <td> </td> <td> <p>32.40000</p> </td> <td> <p>$1,152.000</p> </td> <td> <p>$2,950.200</p> </td> <td> <p>$2,251.000</p> </td> <td> <p>$699.200</p> </td> </tr> <tr> <td> <p>3/10/2004</p> </td> <td> <p>20.00000</p> </td> <td> <p>$366.10</p> </td> <td> <p>LT</p> </td> <td> </td> <td> </td> <td> <p>$576.000</p> </td> <td> </td> <td> </td> <td> <p>16.20000</p> </td> <td> <p>$576.000</p> </td> <td> <p>$1,475.100</p> </td> <td> <p>$1,109.000</p> </td> <td> <p>$366.100</p> </td> </tr> <tr> <td> <p>3/30/2004</p> </td> <td> <p>20.00000</p> </td> <td> <p>$360.00</p> </td> <td> <p>LT</p> </td> <td> </td> <td> </td> <td> <p>$576.000</p> </td> <td> </td> <td> </td> <td> <p>16.20000</p> </td> <td> <p>$576.000</p> </td> <td> <p>$1,475.100</p> </td> <td> <p>$1,115.100</p> </td> <td> <p>$360.000</p> </td> </tr> <tr> <td> <p>10/24/2011</p> </td> <td> <p>10.00000</p> </td> <td> <p>$507.00</p> </td> <td> </td> <td> <p>ST</p> </td> <td> </td> <td> <p>$230.550</p> </td> <td> <p>$57.45</p> </td> <td> </td> <td> <p>8.10000</p> </td> <td> <p>$288.000</p> </td> <td> <p>$737.550</p> </td> <td> <p>$230.550</p> </td> <td> <p>$449.550</p> </td> </tr> <tr> <td> <p>10/25/2011</p> </td> <td> <p>10.00000</p> </td> <td> <p>$503.00</p> </td> <td> </td> <td> <p>ST</p> </td> <td> </td> <td> <p>$234.550</p> </td> <td> <p>$53.45</p> </td> <td> </td> <td> <p>8.10000</p> </td> <td> <p>$288.000</p> </td> <td> <p>$737.550</p> </td> <td> <p>$234.550</p> </td> <td> <p>$449.550</p> </td> </tr> </tbody> </table>


Some bivio clubs use a spreadsheet to easily perform all the calculations above.  Thanks to community member Jim Thomas for developing the original version.   You can find a link to it here if you’d like to determine your own tax consequences from this merger.

ESRX-MHS Merger Calculations 

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