Harrison, Tiffany —
I wanted to pull together in one place a summary of where we stand on the purchase-price allocation approach and the Section 338(h)(10) election analysis for the Solara Digital Infrastructure Fund VI LP acquisition of Cloudium Technologies plc. I know you're both deep in the mechanics on the M&A side, so I'll try to keep this organized and flag the items that need your input.
As a reminder, I've been coordinating closely with Richard Okamura and Vanessa Liu at Glenmore Thornton LLP on both the PPA methodology and the 338 analysis, and what follows reflects our shared conclusions to date.
**1. Transaction Context**
Just to set the table: the transaction is structured as a reverse triangular merger under the DGCL — Stratos Merger Sub Inc. merges with and into Cloudium Technologies plc, with Cloudium surviving as a wholly owned subsidiary of Fund VI. Deal value is $6,800,000,000, reflecting per-share merger consideration of approximately $36.92 across 184,200,000 shares outstanding. Closing remains on track for early July; the parties continue to target July 9, 2024.
**2. Purchase Price Allocation — Summary of Approach**
The PPA will follow the Section 1060 framework, which applies the residual method prescribed under Section 338(b)(5) and the accompanying Treasury Regulations, to allocate the aggregate purchase price among asset Classes I through VII.
*Allocation Base.* The aggregate consideration to be allocated will consist of the $6,800,000,000 deal value, plus assumed liabilities (including the new $3,740,000,000 Term Loan B and any other closing-date liabilities), minus certain adjustments. The exact allocation base will be finalized after the closing statement is delivered and the working-capital true-up is completed under Section 2.7 of the Merger Agreement.
*Key Asset Categories:*
- **Intangible Assets (Class VI):** This is where we expect the most significant allocation. Cloudium's proprietary cloud-native ERP, CRM, and business-intelligence SaaS platform technology is the core value driver. Customer relationships are also substantial — ARR of $1,740,000,000 as of December 31, 2023, with a significant enterprise and mid-market customer base, including the Aegis Federal Solutions Inc. contract alone at $84,000,000 ARR. Trade names and trademarks will receive a separate allocation. Assembled workforce value will be allocated to the extent separately identifiable, though as you know, the case law and guidance on that are somewhat fact-specific.
- **Goodwill (Class VII):** The residual allocation to goodwill is expected to be substantial. At an EV/EBITDA multiple of approximately 16.8x ($6,800,000,000 against $405,000,000 LTM EBITDA for FYE September 30, 2023), there is a very significant premium over tangible asset value.
- **Tangible Assets (Classes I–V):** Relatively modest in comparison. Cash on hand is estimated at approximately $180,000,000 at closing, plus accounts receivable and property and equipment. As you'd expect for a SaaS/cloud business, the hard asset base is limited — Cloudium operates primarily out of leased office space in San Francisco, London, Manchester, Bangalore, and Berlin.
Glenmore Thornton is preparing a detailed valuation study to support the PPA. Their preliminary indications are consistent with our expectations: the bulk of identifiable value will sit in technology intangibles and customer relationships, with substantial residual goodwill. The PPA will need to be finalized within the applicable timeframe and reflected in Fund VI's (and the surviving entity's) tax returns.
I circulated the draft PPA methodology memo on June 15, 2024. **I'd appreciate it if you could both review and provide any comments by end of this week (Friday, June 21).** I want to incorporate your input before we go back to Glenmore Thornton with a consolidated set of comments.
**3. Section 338(h)(10) Election — Analysis and Recommendation**
This is the question I know Harrison flagged early on in the structuring discussions, so let me walk through the analysis in some detail.
*Background.* A Section 338(h)(10) election permits deemed asset sale treatment for tax purposes when a "qualified stock purchase" of a target occurs. In a reverse triangular merger where Merger Sub merges into the target and the target survives, the transaction is generally treated as a stock acquisition for federal income tax purposes — Fund VI acquires 100% of Cloudium's stock by operation of the merger. In theory, a 338(h)(10) election would allow the parties to treat the stock purchase as if Cloudium had sold all of its assets and then liquidated, providing a stepped-up basis in the target's assets.
*Key Threshold Issue — Eligibility.* Cloudium Technologies plc is incorporated under the laws of England and Wales (Company No. 09734521). It is a foreign entity. Section 338(h)(10) elections are available only where the target is (i) a domestic corporation that is a member of a selling consolidated group, (ii) a domestic S corporation, or (iii) a domestic subsidiary in certain affiliated group contexts. Because Cloudium plc is not a domestic corporation, **a Section 338(h)(10) election is not available** with respect to the acquisition of Cloudium plc directly. This is a hard statutory limitation, and there is no viable workaround given the current transaction structure.
*Alternative — Regular Section 338(g) Election.* A regular Section 338(g) election could theoretically be made with respect to Cloudium plc (treated as a foreign corporation for U.S. tax purposes). However, this would result in Cloudium being treated as having sold all of its assets at fair market value and then repurchased them — creating an immediate tax cost at the entity level without a corresponding offset from a seller-side basis step-up (which is the benefit the (h)(10) election provides by allowing the selling group to net the deemed sale gain against its existing basis). We also need to be mindful that Cloudium holds an EIN (83-2196754) and appears to be a U.S. taxpayer, likely as a dual-resident entity or one that has made a check-the-box election. The consequences of a 338(g) election in that posture require careful evaluation, and we have done that work.
*Practical Conclusion and Recommendation.* My analysis, which Glenmore Thornton has independently confirmed, is that we should **not** make a Section 338 election — either (h)(10) or (g). The reasons are as follows:
- A 338(g) election would trigger immediate recognition of gain on the deemed asset sale at the Cloudium entity level, generating a current tax liability that is significant given the spread between Cloudium's inside basis and the fair market value implied by the $6.8 billion deal value.
- While the resulting step-up in asset basis would generate amortization and depreciation benefits over time, the present-value cost of the immediate tax liability significantly outweighs those future tax benefits. This is particularly true given the substantial goodwill component (Class VII), which is amortizable over 15 years under Section 197 — a long tail to recover the benefit.
- The cross-border complexity adds further tax friction. Cloudium Technologies UK Ltd. (approximately £312,000,000 / ~$390,000,000 in revenue), Cloudium Technologies India Pvt. Ltd., and Cloudium Solutions GmbH each present potential double-taxation risks and incremental compliance costs in the event of a deemed asset sale.
The transaction should therefore be treated as a stock acquisition for tax purposes. As a separate but related point, the rollover equity participants — Jonathan Hargrove rolling approximately $142,814,544 and Pinnacle Growth Ventures LLC rolling approximately $473,241,408 (total rollover equity of approximately $616,055,952) — will continue to be analyzed under Section 368(a)(2)(E) reorganization principles per our November 1, 2023 tax structuring memorandum. Their rollover should qualify for tax-deferred treatment to the extent the continuity of interest and other reorganization requirements are met; I don't see any issues there based on the current deal terms.
One final note on the interplay between these two analyses: even absent a 338 election, the PPA remains necessary and important. The allocation will be required for financial reporting purposes under ASC 805 (business combination accounting) and for allocating basis among assets for purposes of future depreciation and amortization deductions to the extent any stepped-up basis is available through the transaction structure.
**4. Coordination with Transaction Costs Deductibility Analysis**
I am separately finalizing the memorandum on the deductibility of estimated transaction expenses of approximately $185,000,000 under Sections 263 and 195 of the Internal Revenue Code. I expect to circulate that memo by **June 20, 2024**.
The central question is the allocation between costs that must be capitalized as part of the acquisition (e.g., advisory fees, legal fees directly related to the acquisition of the stock) and costs that may be currently deductible (e.g., certain financing costs, integration planning expenses). A few specific items I'm working through:
- **Debt financing costs:** The costs associated with the $3,740,000,000 Term Loan B (SOFR + 325 bps, 7-year maturity, July 9, 2031) and the $500,000,000 Revolving Credit Facility (SOFR + 275 bps, 5-year maturity, July 9, 2029), including arrangement fees and OID under the fee letter, will be amortized over the life of the respective facilities under the applicable rules.
- **R&W insurance premium:** The $13,600,000 premium paid to Northfield Assurance Ltd. (Policy No. NFA-TRI-2024-00487) and the associated broker fee of $680,000 paid to Peregrine Advisory Group LLC will need to be analyzed for capitalization treatment. My preliminary view is that these are properly capitalized as acquisition costs, but I'm confirming with Glenmore Thornton.
I'll address all of this comprehensively in the June 20 memo.
**5. Next Steps and Action Items**
To keep everything moving on the tax workstream:
1. **Harrison and Tiffany** — please review the draft PPA methodology memo (circulated June 15) and provide comments by end of this week.
2. **Leonard** — I will circulate the transaction costs deductibility memo by June 20.
3. **Leonard / Glenmore Thornton** — Richard Okamura and I will finalize the PPA valuation assumptions after receipt of the estimated closing statement (expected July 8, 2024) and the final closing-date balance sheet.
4. **Post-closing** — I will prepare a post-closing integration tax considerations memo addressing intercompany restructuring, IP migration from Cloudium UK and Cloudium Solutions GmbH, and transfer pricing. I'm targeting circulation shortly after closing.
5. **Tiffany** — could you please flag any open items on the working-capital true-up mechanics under Section 2.7 of the Merger Agreement that could affect the PPA base amount? I want to make sure we're capturing any adjustments that flow through to the allocation.
For reference, the key tax work product on this matter to date is: (a) the Tax Structuring Memorandum — Reverse Triangular Merger / Section 368 Analysis, dated November 1, 2023; (b) the draft Tax Memorandum — Purchase Price Allocation Methodology, circulated June 15, 2024; and (c) the forthcoming Tax Memorandum — Deductibility of Transaction Costs, expected June 20, 2024.
Happy to jump on a call this week if it would be helpful to walk through any of the above. I'm generally available Thursday afternoon or Friday morning.
Best regards,
Leonard
Leonard Cross Partner, Tax Calderwood & Harkness LLP lcross@calderwoodharkness.com
---
*PRIVILEGED & CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT*
*This email and any attachments are privileged and confidential, protected by the attorney-client privilege and/or the work product doctrine. This communication is intended solely for the use of the addressees. If you have received this communication in error, please notify the sender immediately and delete all copies.*