The strategic role of the tax function to M&A value creation
Most business leaders recognize that tax issues matter to the ultimate success of transactions. Whether you’re a buyer, seller, lender or investor, tax issues have implications on valuation, financing, structuring, compliance, and virtually every other aspect of the deal cycle.
None of this is new: It’s the way it’s always been; a known fact. But knowledge doesn’t always translate into action.
So what’s the real deal? To what extent do companies involved in mergers, acquisitions, dispositions, and restructurings really account for the tax implications of transactions? Does the tax function truly play a strategic role from planning to integration, or does it sit on the sidelines until the fourth quarter?
To answer these questions, we wanted to get the insider perspective. So in the winter of 2017, we surveyed more than 100 senior-level tax and finance professionals (including Heads of Tax and CFOs) about how tax issues play into the M&A space.
This paper summarizes the survey findings to reveal insights on how corporate leaders can more effectively leverage the tax team from a strategic planning perspective as they evaluate, plan, and execute deals.
Compared to three years ago, the tax issues of deals have stayed the same or increased in importance in the vast majority of companies (97 percent), our survey finds. Why do tax issues matter to dealmakers now more than ever?
Consider that today's M&A market is incredibly active, characterized by both high deal volume and value. In 2017, global companies announced more than 50,000 transactions with a total value of more than $3.5 trillion1 and Goldman Sachs forecasts that spending will climb by 6 percent in 2018.2 Our survey reflects a similar outlook on the 2018 M&A market. More than half of respondents (51 percent) expect more deals in the next 12 months, and chief tax officers and tax directors are especially bullish, with 63 percent thinking deals will increase. Two industries—healthcare (86 percent) and technology (79 percent) industries—also stand out as having the most optimistic expectations for the 2018 deal market.
The predicted bump this year for M&A is expected to be driven by a number of factors. One driver is overall economic strength across the world. Another is the repatriation of offshore profits freeing up cash in U.S.-based companies for potential deals—the result of the new U.S. tax rules, which the President Trump signed into law at the end of 2017.3 In addition, in today's competitive business environment, M&A will continue to be seen as a catalyst for value creation and even a necessity for survival, as disruptive influences cause the lines between sectors and industries to blur. E-commerce giant Amazon's surprising acquisition of grocery chain Whole Foods serves is a prime example of this trend.4
It's no wonder closing transactions with an expensive price tag by the most tax-efficient route has become more critical to deal success. In addition, companies are operating in a period of increasing shareholder activism and investor scrutiny, meaning deals that result in tax benefits help appease anxious onlookers suffering from sticker shock. Consider that it has historically been relatively common for U.S.-based companies to execute cross-border deals that place their home base in a foreign country where corporate tax rates are lower. Of course, these types of tax inversion-based deals will likely decline with the passage of the new tax bill, which cuts America's corporate tax rate from 35 percent to 21percent.5
What's more, 60 percent of survey respondents report that the greater complexity of tax legislation affecting deals has contributed to the increased importance of tax issues in deal making. Cross-border deals are especially complex from a tax perspective. With each jurisdiction regulated by a different set of rules, the global and local implications of M&A transactions can vary drastically from jurisdiction to jurisdiction. Such complexity can result in unforeseen regulatory and compliance issues, potentially preventing M&A deals from achieving their expected value.
Given the increasing importance of tax issues in deal decisions, it's a positive sign that most respondents (72 percent) say their organizations consider tax issues from the very outset of the deal process. In addition, corporate tax functions are now included in more deals than previously. Our respondents report that the number of deals the tax function was involved in during the last 12 months increased in 66 percent of companies, as compared the last three to five years.
Since certain structures are taxable and others are tax-free, assessing tax questions up front is essential to capitalizing on deal value. How a business structures a deal can lead to very different tax consequences and therefore financial outcomes.
In addition, different structures utilized in transactions can change what tax regulations apply to the companies involved, which could result in regulatory and compliance risk if not carefully planned for and managed from the beginning.
As a result, companies should weigh both tax issues and opportunities throughout the deal cycle: in the due diligence and pre-planning phase, including identifying the target's historical tax risks and monetizing the value of a target's tax attributes; in planning the acquisition structure itself in a tax-efficient manner; and in the post-acquisition integration structuring phase, also with an eye toward tax benefits.
According to our survey, less than one-third (28 percent) of companies have a formal protocol for aligning the tax function with other functions when a transaction is being considered. What's more, in many companies (63 percent), the Chief Tax Officer (CTO) doesn't even have final responsibility for signing off on the tax risks of a deal; that's left to the Chief Financial Officer (CFO), deal team or board.
The lack of an official process for connecting the tax team to the deal team is troubling. It can lead to wide range of potential problems and may ultimately limit the success of the deal. Without the tax function's voice at the table during strategic discussions along the way, business decision makers may not fully grasp crucial tax and financial consequences of the deals they evaluate and execute. This may cause them to miss out on tax saving opportunities and/or introduce detrimental regulatory and compliance risks to the business.
In fact, while tax impacts usually aren't the primary deal- drivers, they can certainly be deal-breakers. For example, if a deal team lacks knowledge of the tax impact of a "taxable" spin off, the organization could engage in a transaction that ultimately creates less value for shareholders than expected, or even lose value.
To prevent such problems, corporations must focus on strengthening the relationship between the tax team and the deal team, including the CFO and the board. This includes defining how the tax function is involved at each stage and what its responsibilities are, and establishing clear processes for how (and how often) the tax function should communicate with, report to, and advise the business.
Our survey shows that tax issues are more important than ever to M&A value creation, particularly from a strategic planning perspective. To improve the odds of deal success, we recap the following tips with corporate deal makers:
Include the tax function early and often:
Assess tax issues and impacts—including both opportunities and challenges—for every decision through every stage of the deal cycle, from pre-planning to post-integration. Get buy-in and alignment across the business by defining the tax function’s role and responsibilities in transactions up front and then formalizing processes to engage the tax team in strategic deal decisions.
Carefully assess the tax risks of deals:
Always consider the potential pitfalls of deals from a financial standpoint, such as increased tax liabilities. And don’t overlook possible regulatory tax and compliance risks of transactions, especially cross-border transactions. Proper risk management should be an ongoing process of evaluation, as regulators shift focus and tax rules change.
Connect tax decisions to the overall growth strategy:
While certain structures can result in tax benefits, transactions should rarely be driven solely by tax (or even financial) considerations. Tax efficiency should be seen as an added benefit of a good deal plan that is aligned to the company’s growth goals, not the reason behind the deal.
The importance of understanding and planning for the tax implications of your transaction cannot be overlooked. It can mean the difference between exposing your business to dire risk or taking advantage of valuable transaction opportunities. Our M&A Tax professionals can help. We have deep experience creating tax efficiencies throughout the life cycle of a client’s business for support in understanding the tax implications of a deal, structuring deals in a tax-efficient way, and creating tax efficiencies through the life cycle of the deal.
Achieving the full expected value of your company's major transactions is crucial to future success. And you're probably spending countless hours and dollars chasing that value. However, you may be overlooking a key piece of the puzzle: The tax implications of the deal. That's where KPMG's Complex Transactions Group comes in. With experience overseeing numerous front-page transactions, we help multinational corporations and investor groups manage their transaction's tax profile to achieve the deal value they expect—and often more.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the authors only, and do not necessarily represent the views or professional advice of KPMG.