Deloitte Tax At the Right Price (042808)

8/8/2019 Deloitte Tax At the Right Price (042808)

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Audit. Tax. Consulting. Financial Advisory.

International Tax

At the right price.How a disciplined approach tointernational tax can drive M&A value


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At the right price.


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e four words that matter most

In the last few years there has been a remarkable resurgence of mergers

and acquisition activity, and in particular cross-border M&A. Despite

temporary market concerns, globally mergers are up 31% in the past

two years, and cross-border M&A transactions are on the rise in North

America, Asia and Europe.

Even in turbulent market conditions the market continues to be driven

by competition, where cash has replaced stock as the consideration of

choice. The importance of executing acquisitions that are grounded by

sound fundamentals has never been higher - for your leadership team

and indeed for you.

While temporary market concerns may have slowed the recent

buying frenzy, the long-term benefits of acquisitive growth will

inspire multinationals to continue their aggressive pursuit of global

opportunities. In fact, recent liquidity conditions may, as financial buyers

consider market factors, result in more competitive opportunities for

multinational corporations. This may put even more emphasis on making

a deal - At the right price.

It is, however, impossible to truly know the right price for a cross-border

merger or acquisition without factoring in the international tax and

treasury considerations of a transaction. This booklet explains how to

explore the international tax issues and opportunities early in the process,

which can help you consider the right price and pursue a deal that works.


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Big Deals =

Big Opportunities + Big RisksDespite some recent setbacks, the volume and size of deals and

transactions remain strong. According to Thomson Financial, deal

volume to September 2007 (YTD) in the US was $1,282 Billion,

compared to $567 Billion in 2003 (full year). Though the market

has cooled in some areas, most notably in private equity due the

tightening credit markets, multinational corporations appear to

remain active, perhaps after being priced out of the market in

recent years.

And an increasing percentage of the largest M&A deals is comprised

of cross-border transactions. Of the top 100 deals in 2006, 26 had a

multinational dimension, compared to only 14 in 2005.

Where an M&A transaction has complexities of scale and a cross-

border element, having a clear M&A vision thats aligned with your

business strategy is critical. But this is only the beginning because

vision alone wont create real value unless its executed effectively.That means tightly managing literally hundreds of details in

multiple countries that have to line up for the deal to generate the

expected benefits.

And these inherent difficulties are made even more challenging by

the pressure to move quickly to fend off competitive threats.

Keeping international tax planning as an integral aspect through

all stages of the transaction can contribute to a deals success. In a

cross-border M&A, almost every decision made -- in screening and

due diligence through valuation, HR, operations and post-merger

integration, will have international tax implications.


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M&A from start to finish

The M&A lifecycle begins with a search for answers to a host of questions: How

to stay ahead of a new competitor? How to reduce costs? How to optimize

revenue? Where to manufacture? Where to sell what and to whom? How to

reduce costs even more? What are the best acquisition targets? Where are the

hidden pitfalls? How to structure the deal? How to execute? Whats the right

price?

The difficulty of finding the right answers to these questions is compoundedby the fact that your competitors are inevitably also asking similar questions.

In particular, all players focusing on the same target, can lead to protracted

struggles, with the eventual winner paying considerably more than it had

originally planned. In this competitive environment, it is vital to anticipate

potential hazards and evaluate the target thoroughly and accurately from a

long-term strategic, after-tax profit perspective.

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Strategy

If youre going to do it, do it right.

Many C-level executives understandably find themselves preoccupied with

the next deal. Making a large acquisition is an extraordinary event that can

dramatically alter a companys performance and a decision-makers career

for better or worse.

The odds of a better outcome shorten considerably when international

tax considerations are brought into the discussion at the earliest possible

opportunity ideally when potential targets are being screened, but certainly no

later than during the due diligence process. The international tax considerations

are a significant factor in any cross-border transaction and ignoring them can

have serious consequences for deal-makers, for example, winding up with a

40% global tax rate when the income tax rate that was envisaged was 28%.

While factoring in the international tax consequences in itself doesnt turn a bad

acquisition into a good one, being cognizant of the consequences can help you

avoid deals that are unworkable or over-priced. Below are some of the lessons

that can be learned from successful deals:

Complement the corporate strategy

Align your acquisition strategy with corporate and business unit strategies

Identify target screening criteria that will create real value for your company

Regularly screen sectors for firms that fit screening profiles

Understand your companys global tax structure, treasury profile and effective incometax rate across jurisdictions

Clearly identify the sources of value

Identify sources that will drive the focus of the team during due diligence

Perform thorough financial, tax, legal, operational, strategic and technology duediligence

Execute the diligence objectively, effectively and quickly

Pay the right price

Identify and understand both the commercial and tax risks

Use international tax structuring as a competitive advantage

Realistically calculate the maximum purchase price that can be paid

Compare the price with the expected synergy

Be willing to repeat the analysis and update targets as often as necessary in responseto changing competitive and market conditions or effective income tax rates

Calculate all prices and profit margins based on after-tax figures, using the correct coredata, rather than a guesstimate.


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Factors that will need to be considered:

Whether the target company has a global tax, treasury and finance structure

that serves its business needs.

The degree to which that structure complements your existing strategy, e.g.

business treasury, tax objectives, etc.

The possibility of developing a global strategy to achieve all of these

objectives.

Whether the target regularly repatriates cash, and if so, how that cash is

used, and whether the repatriation strategy operates efficiently?

The amount of cash the target company has overseas and whether its

treasury strategy complements that of your own organization?

The target companys effective income tax rate and how that compares with

its competitors and your own company.

Whether the target has recently been audited or subject to any penalties.

The compatibility of the targets overall global tax and reporting structure

with that of your organization and the extent of the work required to

integrate the two.


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Target Screening and Due Diligence

Look (hard) before you leap

One of the biggest dangers in any M&A activity today, and one that is only

exacerbated by a fierce competitive environment, is the tendency to see more

value in an investment than actually exists. Clear analysis of the accounting and

global tax positions of an acquisition target is therefore crucial if you are to avoid

exposing your company and yourself to unnecessary tax risk.

The importance of disciplined screening and due diligence may require importing

extra resources even the best finance and tax departments may not have

the experience and time to delve into the necessary minutiae. Effective M&A

professionals can find openings to create value but will also not be afraid to say

no swiftly and decisively to a deal that is unlikely to meet your requirements.

At the beginning of the due diligence effort, set goals and targets for

analysis and be sure to cover at least 90% of them.


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Proper execution of global tax and treasury functions canenhance the value inherent in an acquisition.

Recurring P&L ConsiderationsEfficient Leverage Structure

Post-transaction rationalization oflegal entity structure; fiscal unity andefficient use of tax attributes

Integrated operational strategies withtax opportunities

Global income allocation (state,

local, federal, international); identifyactivities to be conducted in low taxjurisdictions; centralized offshoretreasury function

Transfer pricing and cost-sharinganalysis

One Time P&L Considerations

Analyze alternative structures tominimize/defer income tax, transfer

tax and capital tax Accelerate/utilize favorable tax

attributes of target

Minimize transaction cost;- Golden parachutes- Transaction cost

Tax efficient disposition ofunwanted assets

Tax benefit restructuring/integrationcosts

Measure of Success

Reduced effective tax rate

Increased EPS

Enhanced cash flow

(repatriation and redeployment)

Minimization of transaction

taxes

Tax-efficient exit strategies


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Transaction Execution

Structuring deals with strategyin mind

By focusing on where youll gain efficiencies and value to justify the price, your

accounting experts will evaluate the synergies expected to result from an M&A

transaction. How much overhead will the deal really cut? How will additional production

capacity drive opportunities in other jurisdictions? What will you gain from a combined

sales force? How will you drive new revenue and reduce costs?

But the workability of a cross-border transaction often hinges on its international tax

consequences, especially when its successful execution requires cash to be deployed or

repatriated to where it is needed. Without the right tax strategy, you wont know how

to create the optimal combined structure to deliver the maximum benefits. And you

wont be able to move money and deploy cash the way you need to; for example, to

service debt associated with the deal. The tax structure has to fit not only with how you

intend to operate the combined business, but also with your Treasury needs.

There is no substitute for modeling. Intuition is not always correct. Modeling highlightsthe unique cross-border tax and treasury issues that will arise, so that the two pieces

of the transaction create the desired synergies. This may include retaining and utilizing

positive global tax attributes and eliminating the negative ones. This may also include

minimizing future taxation of global synergistic income.


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The plan must be executed

After an extensive nine-month process, a U.S.-based multinational operating

in the consumer products industry expanded its top line by 80% and increased

global reach through the acquisition of a European-based multinational. The

demanding transaction required in-depth analysis by the operational, legal and

finance teams of the acquiring company. With a price of seven times EBITDA,

the transaction factored in significant after-tax earnings and cash flow to service

debt and fuel additional investment.

An effective tax rate of 31%, coupled with a flexible global cash mobility model

was included in the financial projections that supported the successful bid and

requisite return on investment. This was based on the success of post-acquisition

integration planning identified during the due diligence and structuring phases.

The planning included:

Restructuring offshore subsidiaries allowing for the repatriation of foreign

earnings to be offset by Foreign Tax Credits (FTC).

The grouping of entities in common jurisdictions for consolidated filingsand related local country planning.

However, various demands on both organizations took the focus away from

completing these and other actions, and the global effective tax rate spiked

to 41% in the year following the transaction. This put significant strain on

earnings for the company, and impacted the organizations ability to grow and

compete in new markets for deals. Additionally, the political clout of the M&A

group within the acquiring company was curtailed in the months following

the transaction.

The deal didnt fail post-acquisition execution failed.


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Integration

Beyond Day One

Unfortunately, many companies fall short when it comes to following

through on merger integration especially in the context of the international

tax issues. Because the structuring documents will lay out a timetable for tax

matters that must be attended to after the transaction is completed, lack

of awareness is rarely the problem. Rather the key people who drove the

acquisition tend to become involved with other issuesperhaps the nextdealand important post-merger steps dont receive the attention they

require.

Continuity across the entire life cycle of a major transaction is therefore key.

A well-managed integration plan, which calls on experienced tax resources

can go a long way towards exploring all necessary actions for the ultimate

value that you expect.


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Using the right tools

Geography frequently drives much of the agenda in cross-border deals. To get to

the right price, youll need tax and finance professionals in every country in which

you will be operating to provide vital and timely advice. More to the point, you need

experienced people who can hit the ground running otherwise youll lose valuable

time and run the risk of mistakes that could have been avoided. This is especiallycritical during the due diligence, structuring and integration phases of the deal.

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Am

ericas

Industry

Knowledge

Europe

Asia

Pacific

M&A Strategy/Target Screening

Due DiligenceDeal Structure

Valuation

Tax Planning

Human Resources

Operations Integration

Systems Integration

Geographic reach

Depth andbreadthof M&Aservices

Previousindustrybased

experienceandknowledge


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Integration

To get it done

The potential rewards and risks of M&A are the justification for the high level of

commitment that such transactions inevitably demand.

The disciplined approach that M&A calls for admits of no corner cutting and will

require a major team effort, with the right people involved throughout the process, all

working towards the same clearly defined goals. And, as such a disciplined approach

often requires resources that few companies have available in-house, at some stage in

a transaction you are likely to need external support.


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No rest for the weary

Despite their glamour and magnitude, many mergers and acquisitions fall far short

of delivering the promised results -- usually because the acquiring company pays too

much. And though many businesses today are better prepared to capture synergies

following a merger, some combinations that seemed like a good idea at the time

ultimately destroy value, damage brands and compromise customer relationships.

Having the right international tax strategies in place can go a long way to increasing

your chances of success. Awareness of the international tax issues is an essential

component in establishing the right price and making sure you have access to the

cash youll need to operate and service the deal. The most astute companies bring

a tightly structured approach to their merger and acquisition activities that involves

international tax knowledge at every step in the M&A process.


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About the International Tax practice of Deloit te Tax LLP

The International Tax practice of Deloitte Tax LLP helps to align global effective tax

rate reduction and efficient global cash utilization strategies with your overall business

objectives and the way your company operates. For more information, please visitwww.deloitte.com/us/ tax or contact your local Deloitte Tax professional.

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and not by the Deloitte Touche Tohmatsu Verein.Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu. In the

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Deloitte Tax At the Right Price (042808)

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