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M&A: Brexit, Tax and Integration

M&A: Brexit, Tax and Integration

M&A: Brexit, Tax and Integration

Economic uncertainty typically reduces the flow of M&A activity, therefore it goes without saying that Brexit poses a significant risk to the Irish market. However, there are always tax factors to consider before embarking on any M&A process, and the coming months may see the addition of several more.

Brexit

A number of UK companies are looking to acquire Irish businesses and this is particularly the case where the acquirer may have either regulatory or supply chain issues post- Brexit, David O’Kelly, partner with KPMG corporate finance says.

“There are also Irish acquirers looking to see whether the current environment creates an opportunity to get a foothold in the UK in an attractive manner. There is clear evidence in the last number of years of Irish companies acquiring targets in European countries, potentially to open up new markets as a hedge against too much dependence on the UK.”

Our 2019 M&A outlook surveyed many of Ireland’s leading executives and M&A advisers for their insights on trends for the year ahead. Findings indicates very high conviction in deal making activity levels in 2019. “This was somewhat surprising given some of the current headwinds – international trade wars and Brexit in particular,” says Mark Collins, partner and head of transaction services at KPMG in Ireland.

“However, given the availability of funding and the need for M&A to drive inorganic growth, it is expected that international deal making in the second half of 2019 can get back to the levels enjoyed through most of 2018. We expect emerging features to include, firstly, technology to drive sectoral convergence and consolidation, secondly, a focus on core activities, with the prospect of larger carve-outs and divestitures and, thirdly, the continuing presence of private equity to hold valuations at relatively high levels for the foreseeable future.”

Tax changes across globe present challenges

The majority of Ireland’s leading M&A advisers and executives – 87 per cent – expect Irish M&A activity for this year to match or exceed 2018 levels. However, there are always tax factors to consider before embarking on any M&A process, and the coming months may see the addition of several more.

While some of the variables that can slow the M&A process can be predicted and planned for, others remain unknown for now. “It goes without saying that Brexit will have a significant impact on Irish businesses,” says Olivia Lynch, tax partner with KPMG.

“From a tax perspective, a no-deal Brexit would impact on supply chains involving Ireland and the UK in that customs duty and import VAT will apply to the import of many goods from the UK into Ireland, and vice versa. This may be of particular relevance to purchasers looking to integrate a newly acquired Irish business into an existing supply chain with goods passing through or into the UK.”

But on the flip side Brexit can open up opportunities for vendors wishing to sell Irish businesses as there is more interest from those buyers looking to have a platform into Europe, including from UK buyers,” says Lynch. While Brexit is an immediate consideration, there are other changes that will take place over the next two years that will impact international deals.

“The international tax landscape has and continues to experience unprecedented changes, and of course, Ireland is not immune to such changes,” Olivia Lynch says. “New tax laws introduced in Ireland such as our new Exit Tax and Controlled Foreign Company charges, as well as those expected to be introduced in the coming years – such as interest limitation and anti-hybrid rules – should be closely considered as part of any proposed M&A transaction. For many purchasers, these areas will not only be a focus from a diligence standpoint, but also more of our work is directed at forecasting the future tax profile of a target business.”

Planning for an effective post transaction integration and culture

Inadequate diligence and planning is a largely avoidable impediment to successful integration, yet it continues to frustrate, and even derail, a wide range of Irish M&A transactions, says Mark Collins, partner and head of transaction services in KPMG.

“Our recent survey, with involvement from many of Ireland’s leading corporate executives and M&A advisors, identified cultural misalignment, people related challenges and inadequate diligence and planning as the primary reasons why businesses fail to successfully integrate post acquisition. In fact, over three quarters of respondents identified these three reasons above other challenges such as inaccurate forecasting, failure to understand market dynamics or insufficient resources. Our advice would be for companies to establish a formalised cultural alignment plan and adequately resource its implementation to mitigate the risk of post deal failure for reasons that should be largely avoidable.”

This is an abridged version of an article which appeared in The Irish Times and is reproduced here with their kind permission.

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