This commentary is co-authored by John Wilson and Janet Pegg.
Some recent comments in the media raise concerns about how GoDaddy Inc.’s upcoming initial public offering will be impacted by the original shareholder’s retention of future tax benefits from GoDaddy’s prior tax losses. However, care should be taken before drawing conclusions about the company’s tax situation, which is one of the most complicated areas of accounting and investment analysis. Investors will mostly be concerned that the tax provisions are fully and clearly disclosed, to allow for full and fair valuation.
GoDaddy, the domain name registration giant, has been treated as a partnership for tax purposes, but the IPO shareholders will buy shares in a new subchapter C holding company. GoDaddy has had significant tax losses over the past few years (and continues to generate tax losses). These losses have created a net operating loss (NOL) carryforward. The NOL carryforward can be used to offset GoDaddy’s taxable income once it turns profitable for tax purposes.
The existing owners of GoDaddy have decided to use a transaction referred to as an “Up-C structure” for the IPO. This structure is common in IPOs of pass-through entities with significant tax benefit carryforwards, like GoDaddy. This will result in the existing owners retaining the majority of the benefits of the existing NOL carryforward when GoDaddy generates taxable income. This is a useful arrangement since the market often fails to correctly value the tax attributes of IPO companies, potentially resulting in a loss of value for the original owners if included in the IPO.
This should not unduly deter potential IPO investors as long as the terms of the NOL carry forward are sufficiently transparent to allow for correct valuation. GoDaddy’s explanations of its tax situation reflect the complexity of the situation, but should provide investors with adequate forewarning. While some small carryforward benefit will accrue to new shareholders, the amount will likely not be material for investment purposes. Moreover, if media predictions are correct, GoDaddy will continue to generate losses, whose tax benefits presumably would be available to post-IPO shareholders.
Please note that this discussion is based on our understanding of GoDaddy’s situation, and investors should not rely upon any tax advice provided.
John Wilson is the Head of Corporate Governance, Engagement & Research at Cornerstone Capital Group and an Adjunct Assistant Professor at Columbia Business School.
Janet Pegg, CPA, is the Head of Valuation & Accounting at Cornerstone Capital Inc. and former Managing Director and Analyst of U.S. Accounting Research at UBS Investment.
Cornerstone Capital Inc. doing business as Cornerstone Capital Group is a Delaware corporation with headquarters in New York, NY.
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