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Elevating Tax: A strategic approach to enhancing overall deal value

11/16/21

Julie Allen
National Tax Services and Mergers & Acquisitions Tax Leader, PwC US
Anthony Sciarra
Principal—Tax Reporting & Strategy, Deals & Transactions Services Leader, PwC US
Samuel Shreeve
Director—Tax Reporting & Strategy, Deals & Transactions Services, PwC US

The deals market is hot and fast-moving — collaborating with Tax early on can be a strategic differentiator that helps enhance overall deal value in a complex, ever-changing environment.

Increased disruption, industry convergence, innovation and transformation, and the need to shift to new business models to stay competitive means that value creation in deals has never been more important. While navigating the dynamic deal environment, businesses should understand the impacts on three key areas that can be important to creating deal value:

  • Strategic repositioning involves determining which capabilities are needed to capture the greatest value and how businesses should be repositioned – models, markets and in other ways – to better capitalize on value drivers. Companies should determine where value accrues in the value chain, and where should a company participate directly.
  • Performance improvement is how an organization can leverage its capabilities to capture a greater share of the value chain and how deals can deliver value by identifying the new levers of value and opportunities for business improvement - including the nature of a company's channels to markets and pricing, its supply chain decisions, and talent.
  • Asset optimization addresses what companies can use to both run existing businesses and expand their portfolios. It also focuses on achieving a tax-efficient capital structure that helps support the company’s broader strategy and operating model, including a productive use of working capital and a workable long-term capital investment plan.

Managing the implications of a deal remain critical to success, but tax issues are just as important. As a strategic partner, Tax can help contribute real-time insights and support throughout the entire deal process to help enhance deal value in each of these impact areas. For example, a buyer needs the right tax strategy and doing a deal is a one-off opportunity to revisit tax structures completely. It allows the business to re-examine the way it operates – such as rethinking their operating model and supply chain design – and helping to create new platforms and policies.

The current regulatory landscape and pending US tax reform is also adding to the complexity of the deal, resulting in both positive and negative implications on deal structures, deal valuations, and post-deal integration plans. Dealmakers should proactively employ Tax to model alternative scenarios to help assess the impact of proposed tax law changes in the evaluation of a target's tax profile and post-deal integration plans.

A keen focus on value creation, in the deal and beyond, can help better position companies for success. Given that, many dealmakers are anchoring deal value in the ‘value bridge’ concept considering all value levers and new deal dynamics.

A ‘value bridge’ can be used to help identify and evaluate the strategic agenda for value creation, both organic and inorganic, in order to help prioritize initiatives that will result in the highest value capture. Every company situation is unique, so the application of the value bridge may vary. However, the mindset of viewing every dimension of a deal as a lever for value applies to any transaction and Tax should be embedded within the overall strategy.

Creating value beyond the deal

The profile of the business is expected to change post-transaction, along with the tax footprint. This provides an opportunity for companies to use the deal as a life event to support a broader transformation of various business functions (e.g., tax). When undergoing a transaction, the business should consider and map out their ideal future state of the post-close company with a heavy focus on day-one readiness and change management.

Example of levers to pull when evaluating value creation and cost of your post-deal Tax function:

  • Global footprint and legal entity structure
    Simplifying the organization’s legal entity structure could reduce SG&A costs associated with maintenance resulting from post-close legal entity volume and complexity. It could also help reduce the overall global tax footprint, leading to tax cost savings as well as lesser statutory and tax compliance tasks.
  • Tax structuring and planning
    Updating your tax planning profile to your post-close geographic footprint and business flows helps enable your function to provide more valuable insights to the business. Tax can also help make sure there are no disruptions on ‘day one’ because of tax, align the tax and legal operating model to the post-close business, capture and create tax synergies, and improve risk management.
  • Benchmarking the post-deal tax function
    A non-bias assessment of your function can provide insights into industry best practices and key performance indicators (KPIs). By benchmarking data, an enterprise can understand divergences from peers and detect areas for improvement by identifying the best performance being achieved (i.e., at a specific company, in comparison to a competitor, or in an industry as a whole).
  • Talent and knowledge retention
    Keeping people and cultural aspects upfront in planning is fundamental to helping retain and engage key personnel. In addition, focusing on achieving the right ‘mix’ of skill-sets and retaining historical knowledge can help drive greater value-add to the business.
  • Technology-enabled transformation
    Applying a ‘clean slate’ mentality to your tax ecosystem can help you prioritize quality data and build sustainable, tech-enabled processes that captures a majority of the post-close business needs. Self-service automation tools can help further enhance your data capabilities and bridge gaps between systems, helping decrease ‘manual touch’ and mitigate risk.
  • Operating model considerations
    Whether standing up or integrating legacy tax functions, a transaction helps provide the opportunity to rethink your delivery model. Consider how operating model design can help you become more agile and respond faster to changes while lowering cost and risk. Factor in overall tax footprint, current team constitution, technology landscape, overall strategic business priorities, etc.

Why prioritize value creation?

A trusted value creation plan that covers all aspects – including strategic repositioning, improving business performance, optimizing assets, enhancing operating models, and considering the right tax structure – can aid you delivering transformative value, while also helping to protect the reputation of your organization.

Starting early and engaging Tax throughout the deal process (i.e., planning through execution) can help secure a more holistic, value-add approach. It can also help you manage overall cost and risk to the organization.