Q&A: Evolving M&A strategies: tax considerations
November 2022 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2022 Issue
FW discusses tax considerations amid evolving M&A strategies with Gemma France, Martijn Koedijk, Bob Call and Melissa Magee Page at Deloitte.
FW: In what ways are external pressures in the market influencing M&A strategies? To what extent have the offensive M&A strategies seen in 2021 made way for a more defensive approach in 2022?
Call: By all accounts, 2021 was a record-breaking year with deal volumes up 25 percent and deal values up 62 percent. But now, against a backdrop of rising global inflation, interest rate hikes, supply chain realignment, increased regulatory hurdles and renewed activist pressures, corporate leaders are adapting their M&A strategies to reflect the heightened levels of uncertainty and complexity. As a result, we are seeing M&A leaders and investors take a much more thoughtful and strategic approach to dealmaking. Leaders are running more scenarios, being more realistic about their synergy goals, getting more detailed in their due diligence and taking their time to make sure they are making value-driven deals. Interestingly, uncertainty in the market has not shut the door on offensive M&A approaches but rather seeing the incorporation of defensive resilience strategies by delivering value, optimising portfolios and strengthening positions. As the first US president George Washington observed, “the best defense is a good offense”, and we are seeing evidence of that in the M&A markets today.
“We are seeing technologies introduced to create virtual tax command centres, allowing leaders to visualise the implications of decisions across the tax landscape.”
FW: Could you provide an overview of how regulatory tensions and the political landscape are affecting tax planning for multinationals?
Koedijk: Last year’s elevated levels of M&A activity caught regulators’ attention with $340bn worth of deals facing severe scrutiny since the onset of the coronavirus (COVID-19) pandemic. There is also constant pressure on deals from activist funds, shareholders and even consumers, creating further uncertainties. Perhaps the most notable influence has been the introduction of proposed minimum tax rates on the back of the Organisation for Economic Co-operation and Development’s (OECD’s) base erosion and profit shifting (BEPS) initiatives. That has added a significant layer of complexity for M&A leaders as they start to assess the impacts on their tax models. The traditional weighted average rate may no longer apply. And that may have an impact on the way you structure the business. Related to this are continued initiatives – both by stakeholders and increasingly by companies themselves – to ensure corporates are paying a ‘fair share’ of tax in the countries in which they operate. And these conversations are continuously evolving.
FW: When pursuing M&A transactions to transform a business – such as accelerating digital transformation or reaching new markets, for example – what tax considerations need to be made? How important is it to identify potential synergies, for example?
Call: Transformative change is an enterprise-wide long-term commitment that cuts across business departments and technologies. And tax sits at the centre of the transformation value proposition. Tax synergies regularly can represent more than 20 percent of available deal savings. Significant benefits can be found in tax alignment in the value chain – including among suppliers – and through improved operating footprints and integration strategies. Strategies such as capturing local tax credits and shifting some software to the cloud can contribute to the self-funding of digital transformations. Sophisticated acquirers aspire to transform as they transact. This takes upfront planning and precise execution that realistically often happen in stages over the integration timeline. The first line of focus, however, remains on day one close and establishing an interim operating state. But be warned: the longer post-close execution takes, the less likely management will be able to deliver promised returns.
“Transformative change is an enterprise-wide long-term commitment that cuts across business departments and technologies.”
FW: In what ways are environmental, social and governance (ESG) issues having an impact on tax planning? How is this manifesting specifically in the due diligence phase of a transaction, as well as in a broader sense?
France: Many companies are re-examining their existing business through an environmental, social and governance (ESG) lens and identifying problematic assets to divest. At the same time, potential buyers are increasingly sensitive to risks around workplace inclusion and diversity, the supply chain, brand perception and the impact of climate change. Impact investing is fast becoming a dedicated M&A strategy, and in 2021 around $188bn was spent by corporations on acquiring relevant assets, the highest figure on record. Given these shifts, ESG-related diligence and compliance are becoming key components of deal execution and post-deal transformation. Tax has a key role to play in helping companies set and deliver on their ESG objectives. Tax leaders are helping to identify the tax implications of the enterprise ESG strategy, identifying and implementing opportunities for credits and incentives related to ESG, advocating for greater tax transparency, providing strategic advice on specific ESG initiatives, and helping to set ESG roles and responsibilities in the integrated organisation.
FW: What essential advice would you offer on putting together a detailed strategy and implementing a tax plan that effectively manages the complexities associated with M&A?
Koedijk: In this environment, businesses need to be very thoughtful and purposeful about the tax plan around a deal. There are so many complexities to consider, from inflation and interest rate shifts to new regulations and potential minimum tax requirements. A company simply cannot rely on historical data. Additional analysis is required. As a seller, it is important to be working toward bringing forward some of that transformational value while preparing the deal – thereby helping to support a higher valuation. But that can be a big challenge as the organisation continues to trade and prepare for a carve out or deal. Ultimately, tax leaders will need to know where the business wants to go and how that deal will help get them there. If the decisions made during the integration process are not aligned to the end state, then they are probably counterproductive.
“In this environment, businesses need to be very thoughtful and purposeful about the tax plan around a deal.”
FW: Could you provide an overview of how technology is being used to assist the tax planning aspect of the M&A process? How can companies maximise the benefits?
Page: The most mature M&A tax functions are leveraging tools, such as predictive analytics, robotic process automation (RPA) and digital platforms, to help capture both cost and revenue synergies, ensuring a merger is more than the sum of its parts. When that data and analytics is properly tax sensitised, the tax function is often able to uncover valuable insights that could help drive the integration plan and synergy capture. We are also seeing significant advances in solutions that allow organisations to integrate and combine disparate sources of sales, cost and tax data, helping not only reduce some of the integration risk for tax, but also unlocking new opportunities for transformed processes. Those on the journey to next generation enterprise resource planning (ERP) systems are often further ahead. In the tax office specifically, we are seeing technologies introduced to create virtual tax command centres, allowing leaders to visualise the implications of decisions across the tax landscape.
FW: Given the current macroeconomic environment, characterised by high inflation, rising interest rates and global supply chain challenges, how can challenged businesses and their lenders or investors create value out of transactions?
France: High inflation and rising interest rates are having an immediate impact on financing and the ability to attract financing to deals. Supply chain issues are also creating massive challenges, with shortages of components or raw materials driving up prices and disruption to global supply chains affecting many sectors. This is exacerbating pressure on companies already carrying larger than usual debt burdens following the pandemic, and for those in financial distress, this creates greater urgency to seek new money, new investors and new restructuring opportunities to secure the future of the business. And it is not just distressed companies under urgent pressure to make changes to increase value. Companies face massive pressure to deliver on synergy plans and transformation opportunities, not just at the close of the transaction, but right across the investment term. That is encouraging bidders to undertake more rigorous valuations that are underpinned by dynamic modelling, scenario planning and detailed value extraction plans. So, while we are seeing additional care in the due diligence process, we also expect an uptick in deals for investors looking to deploy capital into the stressed and distressed space – particularly those where a bidder can offer expertise, strategies and synergies to safeguard supply chains and reinforce competitive positioning.
“Tax has a key role to play in helping companies set and deliver on their ESG objectives.”
FW: Against a backdrop of ongoing global volatility and uncertainty, what predictions would you make for M&A activity, and related tax considerations, in the months ahead?
Page: Following a record-breaking year in 2021 and with strong headwinds in 2022, we expect transaction volume to return to 2019 volumes given the complex market environment. The long-awaited wave of pandemic-induced restructurings will also likely start to emerge. Yet while some deals may fall apart in this environment, we expect to see continued strong activity – albeit with extended timelines than in the recent past. As with every disruption, there will be winners and losers. Those that thoroughly prepare and consider the broad range of interconnected complexities facing organisations today will likely emerge the winners. Tax will continue to play an increasingly important role in strategic decision-making. And the leading tax functions will be the ones that not only claim a seat at the strategy table, but also work proactively to help decision-makers understand the tax impacts of their actions.
Gemma France is a senior director in Deloitte UK’s restructuring tax team. She focuses on creating value through corporate turnaround, managed exit and special situations investment. Her priority is to get the best outcomes for clients on big ticket transactions. She is currently overseeing large and complex corporate restructurings to support companies in financial difficulty through rescue, turnaround, and growth, advising special situations investors on opportunities across the restructuring space. She can be contacted on +44 (0)20 7007 0192 or by email: gfrance@deloitte.co.uk.
Martijn Koedijk is an M&A tax partner in the Netherlands with experience in global carve out and post-merger integration (PMI) engagements. He can be contacted on +31 882 888 605 or by email: mkoedijk@deloitte.nl.
Bob Call is the Deloitte global service line leader for the firm’s M&A transaction & integration services and has 30 years of experience working with multinational companies on significant life events including M&A transactions, restructurings and transformation initiatives. He leads complex planning and global integration and divestiture transactions, transformation solutions and legal-entity rationalisation services. He has been recognised as one of the highly recommended tax advisers in North America by International Tax Review. He can be contacted on +1 (503) 727 3003 or by email: rcall@deloitte.com.
Melissa Magee Page is a director in Deloitte Tax LLP’s global M&A tax strategy and innovation. She currently leads M&A tax transformation as global CTO and key innovator. Before taking on the Innovation role, she served as an M&A tax practitioner for a combined 30 years in the US and Switzerland Deloitte firms, serving primarily strategic clients in life sciences providing structuring, tax due diligence and integration services. She can be contacted on +1 (312) 486 3516 or by email: mmageepage@deloitte.com.
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