Vol. 8, No. 7, September 2010

TWO CLOSED DEALS

Meridian Bioscience Acquires Bioline Group of Companies

Deal Marks Tenth Deal for FOCUS in 2010

FOCUS initiated this transaction, assisted in the negotiations, and acted as financial advisor to the London-based Bioline group of companies, manufacturers and distributors of specialized molecular biology reagents. The acquisition included the purchase of all the outstanding capital stock of Bioline Ltd (UK), Bioline GmbH (Germany), Bioline (Austria) Pty Ltd (Australia), Bioline Reagents Ltd, and Bioline USA, Inc. for $23.3 million in cash.

Meridian Bioscience, Inc. manufactures, markets, and distributes a broad range of innovative diagnostic test kits and related products. “We approached target companies on a worldwide basis,” said Gerald Turner, FOCUS Managing Director and co-manager of the transaction. “In Meridian I believe we found the right match for Bioline.” Read more...

FOCUS Secures Recapitalization Financing for FutureTech

FOCUS represented Atlanta-based FutureTech Holding Company in the recapitalization of the firm by securing $4,000,000 in subordinated debt from Peachtree Equity Partners. FutureTech manages strategic holdings in the technology, financial, and healthcare services industries.

George Shea, Partner and Team Leader of the Software and IT Services Group of FOCUS LLC stated, “FutureTech is representative of the type of top-tier software and services clients that we have completed transactions with over the last two years in this tough economic climate.” Read more...

Holding Gain: Considering Imminent Shifts in Tax Policy

By Alice Paik, Strategic Advisor, Brown Advisory

While many details remain uncertain, it is clear that federal tax policy is about to endure a major shift that will have the most impact on high-income taxpayers.

Early in his presidency, George W. Bush pushed for a series of tax reductions, including across-the-board rate reductions that were granted by Congress. These rate reductions, coupled with the gradual reduction of phase outs for personal exemptions and itemized deductions, resulted in significant tax savings for all individuals, especially for those individuals in higher tax brackets.

However, these changes in the tax laws were designed to sunset at the end of 2010, with the rates and rules reverting to the laws in effect before 2001. As a result of this sunset provision and lack of Congressional action in the last half of this year, we face an increase in tax rates for all taxpayers.

It appears untenable that Congress and the Obama administration would allow the existing law to simply sunset, resulting in the severe impact of higher rates. If that were to happen, all wage earners would immediately experience a reduction in take-home pay as higher federal withholdings come into effect. Investors would also experience significant increases in taxes on their investments with the tax on long-term capital gains rising from 15% to 20% and the rate on dividends increasing from 15% to an investor’s top marginal income tax bracket (up to 39.6%).

Currently, Congress is considering several proposals that would mitigate this impact. Most notably, the Obama administration has proposed holding the Bush rate cuts intact with the exception of the tax rates for couples earning more than $250,000 per year and individuals earning more than $200,000 (See Table 1). This same group of taxpayers would also experience the biggest impact from reinstituted deduction phase outs and possible further limits on itemized deductions.

Bush Tax Cuts, Sunsets and Administration Proposals
	Rate Through 2010	Rate After 2010	Administration Budget Proposal for 2011
Dividends	15%	Up to 39.6%	20%
Long-term Capital Gains	15%	20%	20%
Individual Income Tax Rates	10%	--	10%
	15%	15%	15%
	25%	28%	25%
	28%	31%	28%
	33%	36%	36%
	35%	39.6%	39.6%
Estate Taxes	Top rate fell from rate of 45% to 0% in 2010	55%	45%
Gift Taxes	Top rate fell from rate of 45% to 35% in 2010	55%	45%
Carried Interest	15%	20%	Up to 39.6%

At this point, there seems to be a consensus forming that will generally follow the administration’s proposal with two major exceptions:

The administration initially proposed to limit the increase in the tax rate on dividends to 20% (the rate is currently 15%). However, many in Congress favor increasing the rate to as high as 39.6% – a rate that may have significant consequences for individual investors.
The administration has proposed taxing carried interest (investment earnings paid to hedge, private equity and real estate fund managers) as ordinary income – a significant departure from the current law, which taxes this income as long-term capital gains (15%). Current Capitol Hill debate suggests a proportion of carried interest (at least 50%) would be taxed as ordinary income with the remaining balance taxed at the rate of long-term capital gains.

The estate tax laws are also the subject of much discussion. Absent Congressional action, the rate on estates greater than $1 million will be 55% in 2011. It seems likely – but not certain – that the administration proposal of a 45% estate tax rate on estates over $3.5 million will be adopted. However, there could be changes to lifetime estate planning tools that would limit the effectiveness of strategies, such as Grantor Retained Annuity Trusts (GRATs) and transferring interests in family entities at a discounted value.

Taxpayers also face additional taxes beginning in 2013 as a result of the health care legislation enacted earlier this year (See Table 2). That law provides for an increase in the Medicare tax from 1.45% to 2.35% on earned income over $250,000 for couples and $200,000 for individuals. In addition, there will be a new health care surtax of 3.8% on the lesser of (i) net investment income (which includes capital gains) or (ii) the excess of modified adjusted income over the $250,000/$200,000 threshold.

Adding Together the New Rates, Plus State Taxes, Expected for 2010-2013
	2010	2011-2012	2013
Regular Income
U.S. Federal	35.0%	39.6%	39.6%
Assumed State and Local Income Taxes	8.5%	8.5%	8.5%
Medicare Tax on Earned Income > $250,000	1.5%	1.5%	2.4%
Total	45.0%	49.6%	50.5%

Investment Income Currently Taxed at Lower Rates
LT Capital Gains	15.0%	20.0%	20.0%
Assumed State and Local Income Taxes	8.5%	8.5%	8.5%
Healthcare Surtax on Investment Income	--	--	3.8%
Total Capital Gains Tax Rate	23.5%	28.5%	32.3%

Dividends	15.0%	39.6%	39.6%
Assumed State and Local Income Taxes	8.5%	8.5%	8.5%
Healthcare Surtax on Investment Income	--	--	3.8%
Total Dividend Tax Rate	23.5%	48.1%	51.9%

Hidden Tax Increases (Incomes > $250,000)
Personal Exemption Phase-Out ($3,650)	None	Yes	Yes
Itemized Deduction Phase-Out (real estate taxes, charitable contributions, etc.)	None	Yes	Yes

By historical measures, the proposed top tax rates both for dividend income and long-term capital gains are below the average top rates over the past 40 years. Nevertheless, these changes will result in significant tax increases for those with both high earned income and high investment income.

By our estimation, in the “worst-case” scenario, the top rate for earned income and dividends will be 39.6%. If the administration’s proposal to limit the value of itemized deductions to the 28% tax rate becomes effective, high-earning taxpayers will see their federal taxes increase by as much as 25% in 2011 compared to 2010, and the increase between 2010 and 2013 (when the additional health care taxes become effective) will be just under 30%.

The situation is worse for those with high levels of investment income who have become accustomed to essentially a 15% tax rate, a typical scenario for wealthy retirees. For those investors, tax liabilities could easily rise approximately 35% in 2011 and could increase almost 50% in 2013 when compared to 2010 liabilities (See Table 3).

Sample Client A

Family of 4 Earning $500,000

Wage Income	$500,000		Itemized Deductions	$75,000
Investment Income	$25,000 in Dividends $50,000 in L-T Cap Gains		Personal Exemptions	4

Federal Tax Liability		Increase from 2010

2010	$132,502		N/A	N/A
2011	$164,972		$32,470	25%
2013	$170,072		$37,570	28%

Sample Client B

Family of 4 Earning $2,000,000
Wage Income	$2,000,000		Itemized Deductions	$300,000
Investment Income	$100,000 in Dividends $200,000 in L-T Cap Gains		Personal Exemptions	4

Federal Tax Liability		Increase from 2010

2010	$634,252		N/A	N/A
2011	$791,912		$157,660	25%
2013	$819,062		$184,810	29%

Sample Client C

Retiree Couple with Significant Investment Income

Non-Compensation Income	$120,000		Itemized Deductions	$75,000
Investment Income	$150,000 in Dividends $150,000 in L-T Cap Gains		Personal Deductions	2

Federal Tax Liability		Increase from 2010

2010	$49,820		N/A	N/A
2011	$66,754		$16,934	34%
2013	$75,214		$23,394	47%

Planning Considerations

Although the anticipated changes to tax laws will affect every taxpayer differently, here are some options that you and your financial adviser might consider:

Accelerate gains: By selling stocks sooner rather than later, you can realize your capital gains with lower taxes. However, it is not wise to pay any taxes early by an immediate sale if you plan to hold investments for the longer term (4+ years).

Add to tax-exempt investments, such as municipal bonds in taxable accounts: The higher tax rates do not apply to tax-exempt investments like municipal bonds. This is not a call to adopt this as a single strategy, but rather as part of a broader investment approach that includes other growth-oriented asset classes that help maintain the purchasing power of the portfolio over the long term.

Review location of ordinary income investments: Investments that produce ordinary income such as taxable interest, rents, etc. (with a high probability of including dividend income in this category beginning in 2011), should be reviewed for optimal location. IRAs or other deferral vehicles will allow an investor to capture the total return.

Convert to a Roth IRA: Beginning in 2010, Roth IRA conversions became available to all individuals, with no income limitation. Roth IRAs have no mandatory distributions for IRA owners or their spouses and all withdrawals are tax-free provided they do not occur within five years of conversion. Assets inside and/or distributed from a retirement account will not be subject to the 3.8% health care tax on investment income.

Accelerate receipt of taxable income: Receiving as much taxable income as possible before 2011 may be a good way to avoid higher marginal tax rates for high net worth individuals. For example, executives may want to exercise non-qualified stock options, and business owners who have been contemplating a sale of business assets should move forward.

Review impact of deferring deductions: Typically, deferring a deduction to a year when it would offset income subject to higher tax rates is prudent. However, deferring deductions should be thoughtfully considered (and with the help of your accountant) given the proposed limits on deductions that may become law in 2011.

Act before limits imposed on estate planning strategies: Those with capacity to transfer wealth to future generations should review strategies currently available with their advisors. For example, administration proposals detail a minimum term for Grantor Retained Annuity Trusts, but those put in place before a change would be treated under current law, which results in a higher likelihood of wealth-transfer success.

We recommend that you consult your tax and investment advisers to determine what, if any, changes should be made to your investment strategy.

Alice S. Paik is a strategic advisor at Brown Advisory, an independent investment firm serving individuals, families, and institutions. With $19 billion in client assets, the firm has offices in Washington, DC; Baltimore; Boston; and London. Ms. Paik can be reached at 202-263-0710 or apaik@brownadvisory.com.

Active FOCUS Deals

Operating nationally and internationally, FOCUS is currently working with buy- and sell-side corporate clients, private equity groups, holding companies, and late stage venture capital firms in the following areas:

Advertising & Marketing
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We have executed dozens of transactions in a range of market segments, but the same fundamentals apply across all of them. Our on-going transaction process provides us with up-to-the-minute market knowledge in these sectors that may be of corporate development interest to you.

Inquiries should be addressed via e-mail to info@focusbankers.com, by telephone to 202-470-1973 or by fax to 202-785-9413.

FOCUS ADDS TWO EXECUTIVES

David Freeland Joins FOCUS' Washington, DC Office as a Principal

Brings Wealth of Telecommunications & Technology Experience

David Freeland has joined FOCUS as a Principal in its Washington, DC office. According to Doug Rodgers, CEO and Managing Partner of FOCUS, “David has more than 15 years of experience providing investment banking and management consulting services to a wide variety of corporate clients.”

About David Freeland

Prior to joining FOCUS, Mr. Freeland was an investment banker, first at America’s Growth Capital and then at Redwood Capital Group. Mr. Freeland began his career as a management consultant, working first at Monitor Group and then at CRA International. Mr. Freeland graduated with a B.A. in History from Middlebury College and received his M.B.A. from the Columbia Business School. Read more...

Don Cook Joins FOCUS’ Los Angeles Office as a Managing Director

Don Cook has joined FOCUS as a Managing Director in its Los Angeles office. Mr. Cook has more than 25 years of consulting, operations, and M&A experience in the healthcare industry. According to Paul Richey, Managing Director, West, “Don has built and operated both private and public companies in a number of areas including surgery, cardiology, home infusion therapy, and physician practice management. His vast experience will be of great benefit to our healthcare and life sciences clients.”

About Don Cook

Prior to joining FOCUS, Mr. Cook founded and was the CEO of Pacific Surgical Partners, LLC, a surgery center management and development company located in Los Angeles. Mr. Cook served as Executive Vice President of Coram Healthcare, a merger of five public companies in the home infusion therapy industry which became the largest industry participant with over $500 million in annual sales. Mr. Cook also founded CORDA Medical Care, a cardiovascular practice management company. Mr. Cook has written, spoken and consulted extensively in the areas of management, strategy, and operational effectiveness. He holds an MBA from the Kellogg School of Management at Northwestern University.

FOCUS Industry Practice Groups

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► Education & Human Capital -- www.focusbankers.com/education

► Energy -- www.focusbankers.com/energy

► General Middle Market Businesses

► Government, Aerospace & Defense -- www.focusbankers.com/gad

► Healthcare & Life Sciences -- www.focusbankers.com/health

► Information Technology -- www.focusbankers.com/technology

► Telecommunications, Wireless & Media