3 minute read 16 Apr 2018
old and new

How tax teams can help maximize deal value

By

Bridget Walsh

EY Global Head of Transaction Tax

Recognized private equity strategic advisor. Entrepreneurial businesswoman with track record for building and growing new business markets. Passionate about the power of digital transformation.

3 minute read 16 Apr 2018

With deal valuations and competition for high-quality assets increasing, tax teams can help to maximize deal value, according to our April 2018 M&A report.

There are several issues that global executives are having to navigate as they seek to transform their businesses to compete in today's increasingly complex and competitive landscape.

Whether it's seizing opportunities or managing risks, the decisions companies make around dealmaking will have consequences. Tax directors and their teams can play a key role in making sure tax is properly understood in the value of the transaction and protecting from the potential complications of an increasingly complex global tax landscape. These are some of the findings from our semiannual Global Capital Confidence Barometer survey.

Divestment outlook

74%

want to complete a divestment within the year

M&A outlook

86%

see the global M&A market improving in the next 12 months

With an uptick in M&A activity, the earlier tax professionals are brought in, the better

With 86% of executives expecting the global M&A market to improve over the next 6-12 months, and with 61% looking to increase their pipeline, 2018 is shaping up to be another robust year for dealmaking. The hunt for cross-border deals, increased competition for limited high-quality assets, and rising valuations are contributing to a highly competitive deal market.

With the added complexity of changing tax policies around the world, from US tax reform to the Organisation for Economic Co-operation and Development's Base Erosion and Profit Shifting (BEPS) project cascading throughout Europe, how deals are structured becomes evermore important. Already, organizations are more disciplined in their dealmaking, with 73% saying they have failed to complete or walked away from a deal in the past year.

It's possible more deals could be completed if the tax director had a seat at the table from the beginning of a transaction. In our experience, when tax professionals are involved from the outset, it improves the odds that the proposed transaction structure is the most suitable and has longevity, while considering all of the commercial aspects of the transaction. In addition, the competitiveness of the bid tends to be enhanced on both the buy- and sell-side. Tax professionals can help the organization to better understand tax in the context of the value of a transaction. Early engagement from the tax team helps with making the transaction fit for purpose earlier in the process, avoiding last minute changes and competitive disadvantages. Moreover, legislative changes, particularly in the EU where governments are mandating that companies align the substance of their business and profit centers to the location in which they operate, make the need for strategic tax structuring — and more bespoke, independent tax structuring — evermore critical.

When considering portfolio transformation, avoid leaving money on the table by thinking about tax implications

For 70% of global companies, portfolio transformation is the most prominent issue in the boardroom. In an era of accelerating change, how companies reshape their portfolios can mean the difference between surviving and thriving. As a result of the reviews organizations have undertaken, 71% say they have identified assets that are either underperforming or at risk of being disrupted that they are planning to divest. Seventy-four percent expect to do it within the year.

As we suggested in a supplement to EY's 2018 Global Corporate Divestment Study, companies are increasingly pointing out that tax contributes significantly to deal values. In many instances, value is being left on the table because companies are not appropriately identifying and communicating the tax risks and assets. Additionally, as noted above, tax authorities around the world are becoming increasingly focused on making certain that a group's taxable presence aligns with its operational presence. Involving the tax team in any portfolio transformation can help to ensure tax is considered in a robust and commercially aligned way to meet compliance obligations in an increasingly complex and purpose-driven legislative landscape.

Political instability means organizations need to be vigilant about the implications of new tax reforms

With all major indicators of the global economy pointing up, executives see little downside in their economic outlook. However, there are external factors beyond their control that have them concerned. Forty-eight percent of the respondents cite political uncertainty as the greatest near-term threat to their growth plans.

Taxation is one of the key pillars of any government's time in office. Political instability can create an uncertain climate and can often lead to ambiguity around whether there will be changes in tax regimes. Therefore, it is important to have a good understanding of the tax implications to the business of any changes in tax legislation long before a deal is done.

Whether buying or selling, companies that engage the advice of their tax team early in the transaction process find that they are better able to maximize deal values. Tax professionals help transaction teams to navigate the complexity of evolving tax reforms around the world, and minimize the risks pre- and post-deal that lead to value erosion.

Summary

With an uptick in M&A activity, the earlier tax professionals are brought in, the better. Thinking about tax implications when considering portfolio transformation can help avoid leaving money on the table. And political instability means organizations need to be vigilant about the implications of new tax reforms. Download the full report (pdf).

About this article

By

Bridget Walsh

EY Global Head of Transaction Tax

Recognized private equity strategic advisor. Entrepreneurial businesswoman with track record for building and growing new business markets. Passionate about the power of digital transformation.