Finding value in the coming consolidation wave with Tax Managed Services
June 01, 2022
Companies facing global supply chain dislocations, worker shortages and other speed bumps coming out of the pandemic should put another disruptor on their list for the year ahead: transactions.
A recent PwC Pulse Survey found that nearly half of all executives polled expect transactions in their industries to be very important for driving growth in 2022. Given the challenges companies face, such as changing customer behaviors and the supply chain disruptions that are contributing to inflation, it wouldn’t be surprising to see a greater pace of dealmaking as business leaders seek to move their pieces on the chessboard.
That's saying something, too, given the speed at which deals were closed last year: 2021 set a record for deals of all sizes. Even with all the potential benefits, proper planning is the key to creating value from mergers and acquisitions. In fact, research conducted by Cass Business School found that the total shareholder return of more than half of acquiring companies underperformed their industry benchmark in the two years following completion of their last deal.
Meanwhile, almost two-thirds of executives at those acquiring companies think their acquisition created "moderate to significant" value.
Clearly there's a gap, and it’s one that can be closed by more precisely tuning a transaction for value creation and working harder in the lead-up to the deal to help find those opportunities. For instance, only one-third of those polled executives said that value creation was a priority on day one.
Headlines focus on the top-line benefits of acquisitions. But those big numbers often obscure the potential gains to be made on the expense side of the ledger.
Deal value, unlocked
Whether it's a private equity buyout with a defined investment horizon, or a strategic acquisition seeking to realize synergies for decades; no matter the reason behind the acquisition there is likely to be value going unnoticed by even the savviest of buyers.
Take critical staff for example. More than three-quarters of executives surveyed in the PwC Pulse survey said that hiring and retaining talent is their most critical growth driver for 2022. These ongoing effects of the Great Resignation can be felt even more so in the tenuous moments just before and after an acquisition.
An acquisition often means that valued staff, sometimes entire departments, are expected to move or reskill. These added expectations can lead to employee churn, and lost expertise can be a drain of value. An executive team committed to value creation can recognize this and be proactive to improve outcomes.
One option that can help companies avoid these challenges and recognize deal value sooner, is with a managed services capability. This is increasingly being leveraged in technically complex areas of the back office, like finance and tax, where third-party consultants who specialize in these complex areas are providing this type of operating model.
These specialized managed services can offer many benefits for executives looking to drive deal value. Managed services can provide speed in efforts to integrate technology and processes. On the people front, it can provide your employees with a sense of an improved career path, while helping to retain their knowledge in service of your company’s goals.
Deal costs can turn into deal value
One example where we’ve been able to help drive deal value with managed services at PwC is in the tax arena, in our Insourced Solutions for Tax solution. A large transaction often creates a major opportunity for the tax department to help the organization become as tax efficient as possible.
Oftentimes, a transaction can create a full reset: operations and payroll will go through a fresh start, creating opportunities to gain efficiencies. This is a great time to capture and help organize the information that is increasingly part of mandated reporting to tax authorities. We’ve seen instances where important paper records related to a company’s inception are sitting in a storage facility, and a deal allows these files to be surfaced and organized. It’s like when you move out of a house you’ve lived in for a long time - you might have a box in the attic, a box in the garage, and one in the closet all related to the same hobby. This is a chance to put everything into one container, labeled, where they can be easily found again, in the future.
This is not a good moment to lose time trying to integrate technology and processes, or to lose the staff who know your company and its tax positioning and records inside and out. Nor is it a good time for them to be distracted by concerns about their job security. Imagine instead where your longtime staff are now supported by, and integrated into, a larger team of specialists in managing tax issues related to integrations: Their efforts will be elevated with specialized knowledge and data to consider global tax strategies that can be analyzed and implemented post-transaction. It can mean avoiding costly mistakes and getting to solutions much faster.
It’s also a great thing to do for your staff, where they can be placed into position for a new career path in a specialist organization. A tax specialist at a middle market firm may not necessarily have room to rise. At a global tax advisory firm, however, career progression and development opportunities can be more readily available.
Many companies will look at a coming transaction and expect a large cost associated with merging two tax teams, while also solving the complex puzzle of setting up the new company for increased tax efficiency. According to the Cass survey, a majority of sellers polled say there is room for improvement on optimizing the tax and legal structure.
“In our past engagements providing this service in a deal setting, we have not found a single transaction where this hasn’t been both a cost savings and an accelerant to finding the better tax strategies for the transaction. It’s a rate of success where it makes us wonder how many other clear opportunities to merge stronger and leaner are being missed in big transactions.”
With better focus at the outset, creative solutions like managed services, especially in specialized areas like tax, can significantly change the odds of success for any acquisition, and help the post-pandemic business world step up to the next leg of growth, smarter and leaner.
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