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Deal models are changing due to tax reform: Three key impacts on acquisitions

11 September, 2018

Aashish Rajguru
Principal, Deals, PwC US
Steve Chin
Director, Deals, PwC US

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:

1. Jurisdictional profit

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

2. Deal structuring

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:

  • Asset deals allow immediate expensing with new tax reform or a step up in value of certain assets.
  • Stock deals allow the target’s net operating losses to be carried over and applied to future taxable income.

3. Tax strategies

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.

What’s needed: A comprehensive deal model

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:

  • Standalone-to-acquisition view: We take a step back from the entire value proposition and analyze the standalone value of the target. Understanding how the market perceives the target compared to management’s view is a crucial step to avoid overbidding. Layering on the specific deal considerations (e.g. synergies, integration costs, tax reform impacts) helps potential acquirers gain a better view of value throughout the process.
  • Governance and accountability: Our approach is specifically designed to document the author, date and rationale of assumptions. These assumptions are then reviewed and documented within the model. This process is especially important for forecasts and synergies in which someone needs to be held accountable after the deal closes.
  • Executive reporting: Standardized outputs can then provide a consistent view of the target value proposition. These outputs help socialize the target internally and externally in a simple manner for the CFO and executive board to review each time.

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.