Areas considered for deal planning
Principal challenges when entering a transaction in emerging markets
Factors affecting the delivery of tax synergies post-deal
“The harder that company boards press for deals to deliver the value they promise, the more tax directors play a critical role in identifying and delivering that value.” Aidan Stokes, Ernst & Young, Global Director of Transaction Tax
Our second annual review of trends affecting tax aspects of corporate mergers and acquisitions (M&A) finds a growing appetite for deals despite continuing economic uncertainty.
M&A is still high on the agenda of large companies. So is tax.
Of the tax directors surveyed:
- 91% said that their companies were likely to consider a deal over the next three years
- More than 1/3 reported an increase in the number of deals with which their function had been involved over the past year
- Only 22% reported a decrease in activity
Tax continues to climb the M&A agenda
The focus on the tax aspects of corporate M&A is intensifying as tax becomes even more important to deal processes and valuations.
57% of tax directors surveyed said their companies place more importance on tax issues as part of the process of doing deals compared to three years ago.
Importance of tax issues in deals
An increasingly critical evaluation of deals by boards of directors is also escalating the importance of tax to transaction opportunities and is making tax a boardroom issue where M&A is concerned.
Company boards are increasingly looking to tax directors to provide them with a full understanding of a deal’s tax impact. This means that companies’ tax functions need to be involved much earlier in the deal process to evaluate tax risks and opportunities and to select a transaction structure through which value is most likely to be realized.
Planning ahead to support the economics of a deal
Companies continue to seek value from transactions in a wider range of tax areas than they have in the past.
More importantly, they are more willing than before to factor this into the value they expect to realize from deals.
When asked in our survey about the range of tax matters considered when evaluating a transaction with a third party compared to three years ago:
- 56% said that it had increased
- 43% said that it had remained broadly the same
- A mere 1% said that it had decreased
Additionally, 2/3 of companies now factor the effects of tax planning into valuations.
Areas considered for deal planning
More and more firms review the tax effectiveness of every area of a company’s operations that could be affected by a transaction. More than half (56%) of those surveyed said that when planning a transaction, they reviewed the tax effectiveness not only of matters requiring immediate attention to get the deal done, but also of other areas of their companies’ operations that could be affected by a transaction.
When evaluating a transaction companies should:
- Have a clear strategy for reassessing the tax effectiveness of every area of operations that could be affected by the deal, not just those matters requiring immediate attention to get the deal done.
- Look to tax directors for an objective and robust assessment of the opportunities and risks associated with tax planning.
Emerging markets come into focus
More than half of the tax directors surveyed said that their companies had done a deal in at least one of the BRIC countries (Brazil, Russia, India and China) during the past three years. The same percentage of tax directors expect to do so within the next 12 months.
Outside the BRIC countries, our survey identified evolving M&A interest in a number of other emerging countries or regions, including:
- Indonesia and Southeast Asia
- South Africa
Principal challenges when entering
a transaction in emerging markets
Even companies with years of experience doing deals in these regions face unfamiliar conditions, particularly legal and regulatory ones. Unsurprisingly, a main challenge is tax. 79% or more of all tax directors identified each of these risks as key challenges:
Tax directors with extensive experience doing deals in emerging markets prepare a thorough assessment of the tax risks associated with a potential transaction, yet accept that uncertainty is inevitable in such markets. This means:
- Striking a balance between uncertainty, limited case law and the unpredictability and duration of litigation versus maximizing the tax effectiveness of an investment
- Making sure that an investment makes commercial sense before the benefit of any tax losses or incentives is taken into account.
- Spending time on the ground to understand the local tax environment — not just the local tax law, practice and procedure but also the reasoning behind it.
- Consulting a range of local advisors and understanding their respective strengths and limitations.
Why tax is vital when making divestments
The early involvement of the tax function is just as important when selling a business, if not more so.
55% of those surveyed this year said they were consulted shortly after the initial decision to divest was taken (up significantly from 2010).
Companies that invest time and effort into planning a sale and anticipating the needs of potential purchasers tend to realize a higher value from their divestments. Such steps can include:
- Identifying a range of possible structures and estimating the tax costs and benefits of each for both the seller and buyer.
- Identifying tax features of the business to be sold that are likely to enhance or erode value.
- Ensuring that the business to be sold is up-to-date with its tax compliance and has complied with all of its obligations.
- Making sure that the business to be sold is able to provide all of the information that potential purchasers might reasonably be expected to request.
Companies that achieve the most from their divestments tend to involve their tax directors as soon as the initial decision to divest is made. That way, they give themselves the best chance of identifying and preserving those areas of tax value that are likely to appeal to buyers.
Key issues that 70% or more of tax directors look at to enhance the value for a potential buyer include:
Issues considered when enhancing value for a likely buyer
The role of the tax director continues once a deal is done
Responsibility for delivering the expected tax value from a transaction falls squarely on the tax director. More than 3/4 of those surveyed said their functions were responsible for delivering tax synergies once a deal was done.
The most significant factor for achieving this is the strength of the relationships between the tax function and:
- Those responsible for the overall delivery of transaction synergies; and
- Those responsible for closing the deal.
Factors affecting the delivery of
tax synergies post-deal
Companies look to their tax directors to deliver the tax synergies that a transaction is expected to deliver. Nearly half of all tax directors felt that delivering tax synergies after a deal had closed was more difficult if the tax function was not brought into the process early enough to identify and evaluate the various synergies.
When it comes to realizing the value that a deal is expected to deliver, a close relationship between the tax function and the finance function is crucial. In the most successful companies, the tax director and tax team will work hand in hand from the outset of a transaction with the Chief Financial Officer, the Corporate Development Officer and their respective teams.
Four steps to driving tax value from M&A
Despite 2011’s market challenges, our survey underscores the positive signals of increased M&A activity and a corresponding heightened importance of the tax director in the deal-making process.
The results of the Global M&A tax survey and trends point to four areas where companies can drive tax value from deal opportunities:
- Support investment decisions at the board level, including factoring tax into valuations
When planning a transaction, involve your tax director as early as possible both to reassess the tax effectiveness of every area of your operations that could be affected by the transaction — not just those matters requiring immediate attention to get the deal done - and to support the inclusion of tax synergies in the deal valuation.
- Navigate the risks of emerging markets
Uncertainty, particularly around tax, is inevitable in emerging markets many of which pose significant additional challenges to doing deals there. The person in the best position to help you strike a balance between this uncertainty and the tax effectiveness of an investment is your tax director.
- Enhance value from divestments
Invest time and effort in planning a sale and in anticipating the needs of potential purchasers. To achieve the best overall result from a divestment, involve your tax director in the sale process as soon as the decision to divest is taken to identify possible structures for carve-outs and disposals and to estimate the tax costs and benefits of each for both seller and buyer.
- Develop processes for delivering tax synergies
Maximizing potential benefits from a deal is facilitated by having established protocols for all the tax aspects of a deal and a collaborative effort whereby the tax director and the tax team work hand-in-hand with the Chief Financial Officer, the Corporate Development Officer and their respective teams from the deal’s origination right through to closing and beyond.