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The third partner was to be an affiliate of Merrill. This
provided Colgate with further reassurance. An equity interest
would reinforce Merrill's incentive to continue to provide
support and to act in a manner consistent with Colgate's interest
when arranging the contemplated partnership transactions.
Merrill would receive an advisory fee and transaction-based fees
for initiating the partnership's asset transfers.
The ultimate challenge for Merrill in designing the
liability management partnership was to find a way to integrate
each step of the CINS transaction convincingly so that the
transaction, as a whole, would stand up for tax purposes. The
Swap Group devoted considerable effort to this task. Although
the basic insight was incorporated in the initial "Colgate
Partnership Transaction Summary" of July 28, 1989, it was refined
in subsequent revisions of this document. The version entitled
"XYZ Corporation: Revised Partnership Transaction Summary",
dated August 17, 1989, set forth an outline of 10 steps to be
taken by the partnership summarized as follows:
Step 1: The partnership is formed with contributions
from XYZ Sub., A Corp. and B Corp. of $30 million,
$169.3 million and $0.7 million, respectively.
Step 2: The partnership invests $200 million cash in
short-term, floating-rate private placement securities
pending acquisition of long-term XYZ debt. The private
placement notes will be issued by highly rated issuers
and will provide the partnership a return greater than
comparably rated commercial paper or bank deposits.
Step 3: The partnership sells the private placement
notes for a combination of cash, which will be used to
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