Globally there were reportedly fewer mergers and acquisitions (M&As) in the first quarter of 2013 compared with the corresponding quarter in 2012. Completion of transactions remains challenging. The key to successful M&As would be fool-proof planning and execution throughout the deal tenure, specifically involving innovative products and options to address the complex deal dynamics and challenges.
According to reports, growth during 2013 is pegged at about 3.5 per cent year-on-year globally. While most of the large economies have been performing at stressful levels, some emerging market economies have supported a modest growth with an expectation of 5.5 per cent in 2013.
The Drivers
The principal objective of a deal today is either access to distribution network, or knowledge of the local market for expansion. Gone are the days when the objective was to nurture the market after the acquisition, and then get into expansion mode. Today the dealmaker’s top priority is: What has the other side brought to the table? — be it technology, customer contacts, or marketing network.
The other unique feature of deals today is the attraction for non-cash consideration. This could be in the form of loan notes, share swaps, or staggered sweat equity — these play a crucial role in M&A deals as they do not contain the ingredient of cash or liquidity.
The challenges
The completion of transactions remains challenging. Both the pre-bid and post-announcement periods remain long-drawn, with a general sense of lethargy in the M&A market. Execution of deals requires rigorous planning and skills. The average conversion rate from announced bids to completed deals has dropped considerably.
In addition, there are several tax challenges faced in the deal process, such as withholding tax obligations, risk of tax on indirect transfer of assets, adherence to transfer pricing regulations and related compliance. There continues to be the issue of multiplicity of tax proceedings coupled with long gestation period before tax disputes are resolved.
deal dynamics
Reverse break fees: In 2012 there was reportedly a stark growth in the percentage of M&A deals with reverse break fees, which is what a buyer pays the seller when a transaction fails. This is now a part of most private equity and strategic M&A deals. A powerful deal-making tool, it should be structured carefully.
Capital structuring: Considering the increasing complexities of conditions associated with deals, structuring of capital infusion is crucial. Such capital structuring has significant tax impact in terms of revenue flows like interest and dividend. For example, while interest is usually tax deductible for the payer company and taxable in the hands of recipient, dividends may be subject to distribution tax in the hands of payer Indian company while being tax free in the hands of recipient. Further, tax implications upon exit also play a key role, and need to be factored upfront. Jurisdiction analysis or countries with preferential tax treaties often find a place in discussion among deal makers on cross border transactions.
Dividend recapitalisation: Traditionally, dividend recapitalisation has been used to unlock the equity in a company and deliver an early payment stream to shareholders. This tool is especially used in the US. Here a company raises debt to make a special dividend payment to shareholders. This is a liquidity route for private equities that are otherwise unable to exit their investments through an IPO or call put option or other means.
With the expected recovery of the global economy, and given that growth and expansion are key deal drivers for most businesses, a revival in global M&A activity can be expected in the near future.
Anil Talreja is Partner at Deloitte Haskins & Sells, and Urmi Rambhia is Manager at Deloitte Touche Tohmatsu India Pvt Ltd