Legal entity strategy – How to unlock value | Deloitte UK has been saved
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Anyone who has ever delved into the legal entity structure of a global corporate group will recognise the truth of the following: corporate legal entity structures can be complex, operationally inefficient, and are often not aligned for business growth.
CFOs through to company secretarial teams see the problem and understand that in an ideal world their legal entity structures would be operationally efficient, tax efficient and fulfil all legal and regulatory requirements, while unlocking the current and future value of their business. In this blog, we look at how work on legal entity structures – particularly during M&A - can deliver a wide range of benefits.
By addressing and optimising their legal entity structures we have seen businesses embed synergies and unlock value ranging from £5 million to over £250 million, creating a sustainable competitive advantage.
There are myriad reasons why legal entity structures are ripe for transformation, including bolt-on acquisitions, historical tax structures, idiosyncratic financing deals, and more. Our clients recognise these complexities within their legal entity structures as well as the resulting operational and cost inefficiencies they introduce, such as time wasted on manual workarounds, complex group reporting and duplicative compliance.
Optimised legal entity structures allow firms to enhance risk management, streamline regulatory compliance and effectively implement business strategy country-by-country. Yet despite the breadth of these benefits, many companies continue to find it a challenge to articulate the true cost/benefit equation. In our experience, individual functions often struggle to articulate a compelling standalone business case to justify the investment, and there may be internal unwillingness to cause disruption due to perceived challenges, such as novating significant commercial contracts or working through the HR implications of moving employees.
However, an optimised legal entity structure can lay the foundation for a leaner, more effective business, and the business case for change extends beyond the benefits for finance, co-sec or other individual functions and companies that have undergone legal entity change feel as though a breath of fresh air has swept through the company and re-invigorated the business. Finding the right time and opportunity, however, can often be a challenge, but is often key to getting a legal entity programme off the ground.
One area where we have seen businesses find catalytic opportunities for legal entity optimisation is across the M&A lifecycle, from scoping out the possibility of deals right through to the full realisation of post-deal benefits.
The question to ask is: to what extent does a deal work through the broader legal entity issues that should be addressed, as opposed to the narrow parameters of getting the deal over the line? Beyond the ‘must-dos’ of restructuring in a deal, optimising the legal entity structure offers significant opportunity to deliver cost and efficiency benefits. But post-deal integration work can stall, leaving legacy legal entity structures that go uncorrected for many more years. Meanwhile, work to carve out a business for a disposal is often not accompanied by the logical next step of asking where else in the business there are opportunities to rationalise the footprint.
Integration work typically entails work to remove duplication, as the integration of similar businesses can result in duplication of activities across legal entities, even within single markets. Failure to address this duplication not only implies excess costs, but can also lead to intra-group friction if different parts of the group continue to ‘compete’ with one another. In our experience, if this integration work is not done early through a comprehensive legal entity change programme, it is unlikely to get done later down the line.
Separation work necessitates decisions around what stays and what goes: which entities will form the carved out business, and which will remain? Entities being carved out may also need to be restructured as part of the mechanics of the deal – for instance, to be placed under a new holding company. Groups often fail to take advantage of the fact that these processes are taking place, and do not re-optimise the residual structures after the disposal.
In order to capitalise on M&A work and drive through further reaching legal entity change, the legal entity change effort should be integrated into the wider integration or separation programme. The wider case for legal entity change should be aligned with the strategic deal rationale, such that successful legal entity transformation means successful transaction execution. To this end, advocates for legal entity work should ensure that the case for change is understood by the leaders responsible for executing the transaction.
M&A is just one possible trigger for businesses to explore the possibilities of broader, more strategic legal entity optimisation. There are significant benefits from working through legacy structures and considering whether current state legal entity structures remain fit for purpose and aligned with future strategy.
To find out more, visit our legal entity strategy webpage, or contact us to find out how we can help you build the readiness you need to unlock value from your legal entity structure.
Simon co-leads Structural Reform for Deloitte and is one of the key partners leading Brexit solutions across Banking and Capital markets. He has led Brexit related programmes across more than 10 Globally Systemically Important Banks (G-SIB) and has a wealth of experience in providing complex finance and regulatory solutions to financial services organisations. He has led numerous programmes involving cross-border mergers, legal entity restructurings, subsidiarisations, jurisdictional analysis and the creation of Eurozone banks.
Meera is an Associate Director in Deloitte’s Structural Efficiency team in London. She leads on legal entity strategy for corporate businesses. She advises clients on end-to-end legal entity strategy, design and operational implementation. Primary drivers include post-merger integrations, carve-outs, regulatory change and intra-group restructuring as businesses regularly review their corporate structure to create operational efficiency, simplicity and cost-savings. Meera also advises C-suite clients on Brexit and International Trade.