Deloitte Integration Report 2015: Useful insights for CFOs and tax professionals when considering your M&A strategy

Tax Alert - September 2015

By Hadleigh Brock

With 2014 showing very strong global M&A activity, Deloitte recently undertook a survey of more than 800 executives to determine what drives successes, and what companies can do pre-emptively to ensure a successful integration and realisation of deal synergies and value. These results have been published in the recent “Integration Report 2015 – Putting the pieces together” which can be found here.

The survey results illustrate a number of learnings and insights - and emphasises that those responsible for tax in an organisation should have a ‘seat at the table’ and active involvement in determining an organisations integration strategy as realisation of tax benefits (say through effective structuring) can give rise to tangible deal value. This is particularly important because tax is often one of the first and least complex opportunities for unlocking deal benefits.

In our experience, pro-actively developing integration strategies before transactions close has traditionally been more successfully implemented in countries such as the US, UK and in Europe – normally in larger scale deals. We in New Zealand have been relatively late to the party in understanding the benefits of proper post-merger integration (PMI) strategies which can support successful execution and add real deal value. It’s worth therefore reviewing the survey results in more detail.

Surprisingly high rate of non-success

Despite 74 percent of respondents stating that they entered into a M&A transaction with a formal integration strategy, almost 30 percent of respondents said that their integration fell short of success. Considering some commentators have suggested the cumulative value of these deals amounted to almost US$3.5 trillion, this is an incredibly discouraging statistic. Of these respondents almost 20 percent said they also fell short of synergy targets. Arguably worse, 10 percent weren’t sure if they met their targets.

This is a significant number when you consider the cost, effort, and drain on resource required to negotiate M&A opportunities.  This emphasises the importance in ensuring that PMI is part of the upfront M&A planning process so that all the hard work put in before transaction execution ultimately doesn’t go to waste (through lost opportunities and value). This includes ensuring planning around design of tax function and implementation of best practice procedures is included in that strategy.

Respondents agreed that the key drivers for successful integration were executive leadership support, involvement of management from both sides, development of a project plan that often included creating a dedicated integration team, and communication.  None of this is necessarily rocket science, but it emphasises the importance of doing the basics right, having a pre-emptive planned approach, methodology, and process for integration. As the saying goes, “failing to plan, is planning to fail”. This is consistent with the results of the survey with respondents noting that the inability to deal with unexpected challenges and lack of preparation were the primary factors for failure. This begs the question of whether some of these challenges were unexpected purely because there wasn’t adequate consideration of them in the first place – or whether appropriate advice wasn’t sought from the outset.

So how should you plan for integration – and how can you, as someone responsible for tax within your organisation, play a key part in this process?

Tax has the ability to feature and ultimately drive the PMI planning process – rather than take a back seat – as realizing tax advantages is often less complex than realizing other synergies such as, for example, cross-selling across the value chain.

Therefore your role in an organisations M&A strategy shouldn’t finish at transaction execution. There are synergies and value that can be realised by, for example, re-designing the management of tax function, consolidating tax compliance procedures, or implementing tax structural change which we as tax professionals have the opportunity to help drive. In addition, we can play a key part in “Day 1” preparation by ensuring the necessary tax registrations and tax processes are in place to facilitate ease of business. A common example of this is ensuring PAYE processes are in place so employees will be paid!

Proper integration planning doesn’t require long drawn out integration plans - but instead focussed and concise documentation. This is supported by the survey results with almost 9 in ten respondents stating that the integration life cycle extended no longer than two years.

Integration planning should also be a constantly evolving process. It’s not, and shouldn’t be, a process that stands still but integration tools should be constantly reviewed and re-evaluated. This was noted as one of the critical lessons learned by executives and is another key area where tax can play a part in ensuring continual improvement in tax processes

An opportune time to redesign your operational model and supply chain?

One of the great opportunities an M&A transaction provides is the opportunity to pause and evaluate your existing supply chain and operational model and ask some big picture questions that are often addressed at the inception of a company and then never revisited. This provides a great opportunity to consider the benefits implementing structural change to realise tax benefits – particularly in a global sense. However it equally applies in the context of how you are doing business (e.g. branch structure, subsidiary etc). Change brings the opportunity to do things differently and sometimes is the catalyst needed for an organisation to implement plans that until now it had only briefly considered.

This is emphasised in the results to the survey where it was noted that another factor in facilitating the success of a transaction involved redesigning not only an organisational model but also an effective operating model – one that was set to address questions such as where will the company operate, what products will it sell, which customers and segments will it target, and what operations will be outsourced.

As outlined above, this is very obviously an area where tax professionals and those responsible for tax within your organisation should have an input so we can help bring these issues to the forefront of deal teams. For those that have taken the opportunity to consider operational change at these points the results appear to have been very successful with almost two in three executives stating that their new organisation redesign was effective (with 40 percent saying it was very effective).

If you would like to discuss any of the survey findings, including how you can implement successful PMI strategy planning into your next transaction, please contact me or your usual Deloitte adviser.

Did you find this useful?