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Merger of Cigna and Express Scripts

TheDude

What is the proper way to record the Merger of Cigna (CI) and Express Scripts (ESRX).

The merger
consideration consisted of $48.75 in cash and 0.2434 shares of stock of
the combined company per Express Scripts share. I own ESRX in a TDAmeritrade account. The transaction posts as:
1) sale of ESRX at $48.75; and
2) "Added" shares of Cigna (CI).

While this seems correct for the ESRX shares, I believe the CI shares will reflect the wrong acquisition date for Cap Gains. That is, I believe the CI shares will reflect the date added as opposed to the date of the original acquisition of ESRX shares.

So, what is the proper way to record this transaction?

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Tom Young

"While this seems correct for the ESRX shares, I believe the CI shares
will reflect the wrong acquisition date for Cap Gains."

it's unlikely that the entry for the sale is correct. This is one of those "cash plus stock" deals that requires some special handling and you most likely will have to do your calculations of gain or loss outside of Quicken, and derive a "proceeds" number, or numbers, to use to book the sale correctly.

"That is, I
believe the CI shares will reflect the date added as opposed to the date
of the original acquisition of ESRX shares."

Part of the special handling for this transaction is the fact that your holding period for the tendered ESRX shares carries over to the new CI shares received, (that date is a field in the "Added" action and your broker may or may not have filled that field out correctly), and the basis of the new shares depends on your booking of the sale itself.

All this is spelled out in the proxy/prospectus you received (emphasis added):
-----------------------------------------------------------------------------------
Tax Consequences to Holders of Express Scripts Common Stock

U.S. Holders

Subject to the discussions below under the section entitled “— Potential Application of Section 304 of the Code” beginning on page 191, the U.S. federal income tax consequences of the mergers to U.S. holders of Express Scripts common stock generally are as follows:
    •     a U.S. holder that receives a combination of New Cigna common stock and cash in exchange for shares of Express Scripts common stock pursuant to the Express Scripts merger generally will recognize gain, but not loss, in an amount equal to the lesser of (1) the excess of the sum of the fair market value of New Cigna common stock and cash received over such U.S. holder’s tax basis in the Express Scripts common stock surrendered and (2) the amount of cash received by such U.S. holder;
    •     the aggregate tax basis of the shares of New Cigna common stock received pursuant to the Express Scripts merger will be the same as the aggregate tax basis of the shares of Express Scripts common stock surrendered in exchange therefor, decreased by the amount of cash received, and increased by the amount of gain recognized on the exchange; and
    •     the holding period of the New Cigna common stock received pursuant to the Express Scripts merger will include the holding period of the shares of Express Scripts common stock surrendered in exchange therefor.

If a U.S. holder acquired different blocks of shares of Express Scripts common stock at different times or at different prices, any gain or loss must be determined separately with respect to each block of shares of Express Scripts common stock that is surrendered in the exchange, and such U.S. holder may not offset a loss recognized on one block of the shares against gain recognized on another block of the shares. Subject to the discussion below regarding the potential application of Section 304 of the Code, any such gain recognized by such U.S. holder will generally be treated as capital gain and will be long-term capital gain if such U.S. holder’s holding period for shares of Express Scripts common stock that are surrendered in the exchange is more than one year as of the effective time of the Express Scripts merger. Long-term capital gains of certain non-corporate holders, including individuals, are generally taxed at preferential rates.
----------------------------------------------------------------------------------

If you only have one lot of Express Scripts stock then the process is fairly simple, but if you have several lots of stock then my suggestion is to fire up your Excel spreadsheet and do your calculations outside of Quicken. The Open, High, Low and Close of Cigna on the first day after the merger (12/21/2018) were:

$178.54
$187.26
$177.11
$181.30

and you are free to derive whatever per share "fair market value" you want to use (there's no "cookbook" formula). At some point Cigna will post a Form 8937 with their suggested per share number. You may want to wait for the Form 8937 before doing your accounting in Quicken, though that's not strictly necessary.

If you need to resort to a spreadsheet for your calculations then I'd suggest listing for each lot of Express Scripts stock:

its date acquired, (it's best to list them in chronological order, oldest first)
its basis,
how much cash was received for the lot,
how many "new" shares were received for those shares tendered,
the total "proceeds" received for that lot which is (number of shares received x per share fair market value) + cash, and
the gain for each lot which is the lesser of cash receive or the gain based on "proceeds" minus basis.

If you have a loss for a particular lot you enter $0 in its "gain" column.

On the same line for each listed lot you can also calculate your basis
in "new" shares received which is: old basis - cash received + gain
recognized for that lot, (obviously $0 for loss lots.)

Now
summarize your gains, if any, into short term and long term gains.
Using only the cash received for your short term holdings, derive a
basis to use against that cash to come to the short term gain you've
determined. Likewise, using only the cash received for your long term
holdings, derive a basis to use against that cash to come to the long
term gain you've determined.

If you've done all this then you're ready to make your entries into Quicken so:

Make one entry to Remove all old shares
Make one
entry to Add back your old short term shares using any date that makes
the new "lot" short term and using a per share cost that comes to the
derived basis determined above.
Make one
entry to Add back your old long term shares using any date that makes
the new "lot" long term and using a per share cost that comes to the
derived basis determined above.
Sell your short term and long term holdings for the cash you received for each "lot'.

At
this point your cash (before cash in lieu) is properly stated in Quicken
and your long term and short term gains are properly stated.

Now
do a series of Add actions to establish each lot of "new" shares using
an appropriate "acquired" date (same as date of lot tendered) and an
appropriate per share cost to come to the basis you calculated for each
lot.

Then
you sell whatever fractional shares you "should have" received for the
cash in lieu, recognizing a gain or loss as appropriate.

If
you have a lot of shares then it's a fair amount of work, though using
the power of Excel you can pretty much reduce the Excel "entry" effort
to listing out the date of acquisition, number of shares and per share
cost of each of your "old" shares.

Several years ago it was clear to me that brokers were submitting 1099-Bs for these deals listing only the cash as "proceeds". It now appears that brokers might be doing all the calculations for you right within the body of the 1099-B itself, setting "proceeds" to the combination of stock plus cash and even including the "derived" basis to use for the sale.

q_lurker

Tom has provided an excellent explanation of the process for this "cash to boot" type of merger. (Cash to boot mergers are where the shareholders of the acquired company receive shares of the acquiring company and cash to boot. The cash may be more or less than the value of the shares received.)

He and I take slightly different approaches in Quicken though the end result turns out the same. Indeed, I have now tweaked my process slightly to make it easier to manage in Quicken.

In this case, I was a shareholder of ESRX so those shares were affected by this merger.

My brokerage determined a fair-market value for the Cigna shares I received at $182.185/sh. (I have not validated their calculation nor asked about their process at this point.) You or your brokerage may want to use a different value. The Form 8937 that Cigna will provide may use a different value. That is not a singularly definite value. Proceed accordingly.

Using that value, the defined share ratio (0.2434) and the defined cash ($48.75) means each ESRC share was valued at 0.2434 * 182.185 + 48.75 = $44.34 + $48.75 = $93.09/share. REMINDER: If you use a different value for the Cigna fair market value, your value received will be different.

From there, you need to determine the applicable capital gain for each lot you held. If your basis per share in ESRX for any lot exceeded 93.09 (or whatever value you determine to apply), you incur no capital gain tax liability from this transaction FOR THAT LOT.

If your basis per share in ESRX was less than $44.34 (or whatever value you determine to apply), your actual capital gains exceed $48.75, so the capital gain tax liability is limited to the $48.75 cash received.

If your basis is between those two values (44.34 and 93.09), some of the cash received (48.75) is deemed to be taxable capital gains.

Those three scenarios are outlined in the spreadsheet I use as depicted below:

Image httpsd2r1vs3d9006apcloudfrontnets3_images1769057RackMultipart20181227-116429-1m71ay2-CI-ESRX_Merger_inlineJPG1545944907

Once that information has been determined for each lot, I am ready to enter transactions into Quicken.

1) Sell the entire ESRX holding for the total proceeds to be received. Caveat: This single-sale will (should) produce the right total capital gain, though the gain on each lot will not be strictly correct. If you prefer, you can sell each lot individually. Any of the mid-price lots (between those two price points) sell for the same value (93.09 in this case), but the cheap and expensive lots all have unique prices. Proceed accordingly and in a manner you can defend.

2) Enter a cash transfer out of the account (XOut). The amount to transfer out is the basis of the new shares that will be added (step 3). This will serve to reduce the net cash addition into the account to the actual cash received. After the Sell Shares and XOut, your cash balance in the account should have increased by the cash received ( $48.75 / ESRX share, in this case). I am transferring the cash to the same account holding the shares (what I term a recursive transaction). That has the effect of reducing the cash in the account without increasing the cash in the same or any other account. The cash has effectively disappeared. You might choose to have a fictional cash account to receive these types of transfer, or to 'spend' the cash as a MiscExp transaction against a special category of your choosing.

3) The third step is to Add in the shares of the acquiring company. To keep future capital gains correct, this should be done on a lot-by-lot basis - one Add Shares per lot. Each Add Shares would specify the correct share quantity, cost basis, and acquisition date applicable based on the original lot holdings of the acquired company and the spreadsheet determination. (Tom's methods use the same step.)

4) After all is completed, any fractional share of the acquiring company is sold for the amount of 'cash in lieu' received (cash received instead of receiving the fractional share). (Tom's methods use the same step.)

REMINDER: Do NOT use the above values (182.815, 43.44, 93.09, etc.) without doing your own due diligence. Your situation and the opinion of your brokerage or tax advisor may be different. At such time that Cigna puts out a Form 8937, I may add a presentation with their figures.

Ralph McGarity

Thanks q.lurker and Tom. I'm faced with the same situation. I did find a form 8937, but it didn't provide an example price/share for the new Cigna stock as these forms often do. I have only one lot and it has a cost basis below $15 per share, so I think I just need to use the Lot 1 calculation highlighted in green in your spreadsheet. Is that consistent with your understanding?

q_lurker

Thanks q.lurker and Tom. I'm faced with the same situation. I did find a form 8937, but it didn't provide an example price/share for the new Cigna stock as these forms often do. I have only one lot and it has a cost basis below $15 per share, so I think I just need to use the Lot 1 calculation highlighted in green in your spreadsheet. Is that consistent with your understanding?

I am disappointed Cigna did not include better info in their 8937: https://www.cigna.com/assets/docs/about-cigna/form8937.pdf

Yes, if your cost basis in ExpressScripts was about $15/sh, you would (by my methodology) be selling that lot for basis+cash received. My second step would be XOut that prior total basis (= your new Cigna basis). Step three as an Add Shares of Cigna, including fractional shares with that same basis from ESRX. Final step -- Sell any fractional share of Cigna from the deal for the Cash-in-lieu received.

Ralph McGarity

Thanks q.lurker and Tom. I'm faced with the same situation. I did find a form 8937, but it didn't provide an example price/share for the new Cigna stock as these forms often do. I have only one lot and it has a cost basis below $15 per share, so I think I just need to use the Lot 1 calculation highlighted in green in your spreadsheet. Is that consistent with your understanding?

Thank you for your advice, and for also the many times you've helped me in the past.

Ralph

joev929

I am on Quicken Premier for Windows 2019. I have reviewed the comments regarding on how to enter this transaction in Quicken I also re-created the spreadsheet from the comments. However, I do not seem to be getting what I feel are correct results. I must have an error somewhere in the spreadsheet. I owned 374 shares (1 lot) from 4/2/2012 at a basis cost of $8199.22 (21.923/share).
This is the second time I have had this type of sale (stock plus cash) since 2012. Why doesn't Quicken add this as an option making everyone's life easier. I see these sales all the time in the financial news.
Trying to track these even in spreadsheets is a nightmare. FYI I own Express Scripts as a result of: Merck buying Medco, then Merck spinning off Medco, then Medco and Express Scripts merging (stock plus cash), now this transaction. Thank you for any support!

q_lurker

(I get frustrated when moderators close posts that don't need to be closed, thus fragmenting discussions. Sigh. For reference: https://getsatisfaction.com/quickencommunity/topics/merger-of-cigna-and-express-scripts)

Based on my spreadsheet, and my assumed FMV of $182.185 / CI Share after merger, I would have

1) Sell 374 shares ESRX for $70.67/share grossing $26,431.72. That is, 48.75 * 374 + 8199.22. That transaction in Quicken should yield capital gains of $18,232.50 (= 48.75 * 374, all the cash you received is treated as cap gains.

2) Enter an XOut transaction removing $8,199.22 from the account. I choose to specify the transfer account as the same account used for the entry. If the account in Quicken is [Brokerage], specify [Brokerage] as the account int which the transfer is being made. The result of that is that $8,199.22 is removed from the account, but it is NOT actually deposited back into the account. You cash balance in the account is reduced by the $8,199.22 leaving the $18,232.50

3) Enter an Add Shares transactions adding in 91.0316 shares of Cigna with a basis if $8,199.22 and an acquisition date of 4/2/12.

4) Enter a Sale of 0.0316 shares of Cigna for the 'cash-in-lieu' amount your brokerage shows you received. That should be about $5.50-$6.00.

After those four transactions, your account should show:

0 shares ESRX
91 shares CI (Cigna)
about $18,238 in cash

HTH

Note: This conversation was created from a reply on: Cigna Purchase of Express Scripts.

Tom Young

My "Quicken" accounting is different than q.lurker's but the end result is the same:

"Remove" your old Express Scripts shares
"Add" your old Express Scripts shares at a per share basis of $0, using a "Date Acquired" of 4/2/2012
Sell those Express Scripts shares for
$18,232.50 in cash
Add your
91.0316 shares of Cigna at a per share basis of $8,199.20 ($90.0698 per share) and a "Date Acquired" of 4/22/2012.
Sell your fractional share for the cash in lieu.

Result: You have $18,232.50 + CIL cash, 91 shares of Cigna with a cost basis of $8,196.35, and two gains, one of $18,232.50 and a small CIL gain.

joev929

q.lurker and Tom, Thank you so much for your help. I see where my error was thanks to you both. Have a great day and again, thank you.......joev929

389EFR

I too am dealing with the ESRX/CI merger. How do you deal with the 1.45% of the cash distribution that was provided by Express Scripts? It would seem to me that this is return of capital and would have to be entered as such somewhere. This isn't mentioned in Tom's or q.lurker's previous descriptions of how to enter the transactions into Quicken. Is this something that I need to adjust for or is it a red herring? Thanks

Tom Young

@389EFR

JEEZE! Was that paragraph referring to the 1.45% of the cash distribution that was provided by Express Scripts stuck in there all along??? Or is this a new version of the Form 8937? I can't believe I missed that in the first go-around.

Actually, the 1.45% of the cash would not be considered a "return of capital", it's considered a sale of a small portion of the Express Scripts stock tendered, with possible gain or loss recognized. The Dell acquisition of EMC has a similar structure and required two different calculations to get it all figured out.

I'll have to get back into this one in the next day or two to refine things.

389EFR

Did a little more digging and found that the 1.45% is called a "deemed redemption" and you get to claim a basis for it and take a gain or loss. The basis is equal to the redemption amount times the original cost basis divided by the fair market value just before the sale. Now the question is how to get it into Quicken!

Tom Young

Getting it into Quicken won't be a problem, you just need to do all the calculations outside of Quicken and then work backwards from "outcomes" to "needed entries."

Mechanically, in your spreadsheet, you have two calculations.

For each lot of Express Scripts tendered you break the lot into two pieces. One piece - the redemption piece - has approximately 0.764079% of the lot's basis, (the actual percentage you derive is based on your per share FMV of Cigna; I used $179.80), and the other piece - the Section 351 piece has the remainder.

The redemption lot gets gain or loss calculated based on a proceeds per share of $0.706875, the 1.45% of cash contributed by Express Scripts.

The Section 351 gain, (or $0 for loss lots), is calculated against the remainder of the cash - $48.04313 per share - plus the FMV of the Cigna shares, and the basis for the Cigna shares is derived in the fashion required for Section 351 transactions.

At that point you are in the same position you'd be in if it was ONLY a Section 351 transaction. You know the cash received, you know your gain, (maybe a loss due to the redemption), you know your basis in the Cigna shares.

At that point it should be pretty much the same process as described above when the conversation involved ONLY the Section 351 gain.

Peg_McKee

First many thanks to all for the 351 explanation! My question is about the "deemed redemption". Tom Young states "the redemption piece has approximately 0.764079% of the lot's basis".

Would Tom (or anyone) please spell out the how 0.764079% is calculated--assuming the FMV of $179.80--as Tom does. Many thanks!

Peg_McKee

More from Peg M:
My brokerage (Vanguard) calculated my gain from Cigna ESRX merger--and it was the same as I got using Tom's & Lurker's but apparently without the 1.45% adjustment. I think they used FMV Cigna $182.19.

I made a practice brokerage account in Quicken and used suggestions from each as to how to enter the transactions. Glad I did since it took a couple of tries.

So that Cigna shows up in Holdings on the right date, when you "Add" the Cigna shares, the transaction date should be 12/24 but the date acquired should be date of first purchase of ESRX (2014 in my case). That way Cigna doesn't show in your Holdings before 12/24 but the date acquired is used for calculating gains. My version of Quicken won't allow adding shares at zero cost basis.

I loved the tip of transferring cash back to same account as a way of removing it.

As for the 1.45% which I still don't understand how to account for it, so I'll ask Vanguard.
Best, Peg M