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The tax reform legislation passed at the end of 2017 opens up new discussions for M&A, treasury and tax strategies and will change how acquirers evaluate targets. Companies need to determine the net present value (NPV) impact of the new policy and factor that into acquisition decisions. Here are some tax reform impacts to consider:
Before diving into the nuances of tax regulations, acquirers need to understand the jurisdictional mix of earnings. This detail can be difficult to obtain in a buy-side transaction due to limitations on data. One method is to use historical comparisons as a proxy for forecast. Another method is to use a Legal Entity Forecast framework to get a more accurate picture of jurisdictional profit on a forecast basis
Deal models need a separate tax module to capture book-to-tax differences, impacts of tax reform and any potential synergies. Structuring a transaction as an asset or stock deal also has implications for taxes:
The tax team should always be consulted during an acquisition, but especially now that the rules have changed. Tax planning may improve earnings per share (EPS) and NPV. New policies like the one-time toll charge, full expensing and tax rate changes open up opportunities to address tax strategy. Management can drive better discussions with a well-conceived deal model with the jurisdictional forecast to support tax calculations. Working together will ensure that the best assumptions are considered to manage and realize the value of the deal.
It’s important to understand some of the pitfalls involved in deals. In a recent report, we outline key concepts that we use to help improve the quality of analyses and success rate of acquisitions:
To get a closer look at how our deal modeling approach can help improve decision making and enhance value creation, check out the full report, Standardizing the Deal Modeling Process to Help Enhance Value Creation. For an in-depth review of the ways deals are impacted by tax reform, read the PwC Deals blog post by David Hall and Vadim Mahmoudov, What dealmakers need to know about Tax Reform.