Making the Most of a Taxing Situation
A CFO's guide to deliberate M&A tax planning
It’s no secret that taxes can have a substantial impact on the success or failure of an M&A transaction. What is less well known is the planning process that your company’s tax group should consider that could increase their chances of identifying tax opportunities while avoiding unpleasant surprises. While some parts of M&A taxation are highly technical, this process is relatively straightforward and adaptable to almost all types of business combinations or carve outs?
As CFO, you can provide guidance and support for developing an M&A tax work plan that will contribute to a smooth transition while capturing tax benefits that may otherwise be overlooked.
Focus on three broad areas
M&A activities can take your company’s tax professionals out of their comfort zones. Beyond dealing with familiar, department-specific tasks, tax personnel likely will, and should, find themselves called upon to contribute to the most important initiatives shaping the new organization.
Before and after the announcement of an M&A transaction, your tax director can play a valuable part in helping your senior management team test for and secure synergies unique to tax, identify pre- and after-tax benefits of changes suggested by operations or other back-office functions, and improve business processes — to name just a few opportunities.
The challenges facing your tax director are broad and complex: to continue to identify and capture tax savings while building tax systems and performing regulatory and compliance functions without negatively impacting personnel, other functions, or critical task owners. To successfully meet this challenge, your tax director must focus on three broad areas:
Deal with the tax technical aspects
In many cases, your tax director may find the tax technical aspects of a transaction the most interesting and rewarding. These issues include dealing with things such as the deductibility of transaction costs, interest expense on acquisition debt, and executive compensation. These and other tax topics can be handled in an abstract form, outside of the context of the overall business transformation. However, the resolution of tax technical issues is just the beginning of the tax-related work.
Address changes needed to the tax department operation
The tax director will also need to address the tax department’s operational needs. These include changes to the SFAS 109/FIN 48 compliance needs (including data, process, and technologies), completion of necessary stub-period tax returns, tax department design (or redesign), tax authority audit management, and information technology needs. These tasks represent the minimum requirements for your tax function’s performance post-transaction.
Put another way, if your tax department overlooks a tax technical aspect—perhaps they failed to recommend optimal utilization of interest on acquisition debt—the sun will still rise tomorrow. However, if they overlook an operational item—for example, they incorrectly prepare the tax provision in the first quarter after the deal close—the consequences to the company and to you may be much more immediate and severe. In our experience, many tax directors focus exclusively on tax technical issues in the beginning, but quickly divert their attention to tax department operations when they realize the consequences and visibility of failure in this area.
Also important is managing the tax department’s human resources effectively. An M&A deal creates a lot of stress that can affect productivity and attrition—just when you need all hands on deck. You and your tax leader will need to pay extra attention to the employees of the tax department during this anxious time, or these valuable contributors may leave just when you need them most.
Identify the tax benefits and consequences of business process changes
Unfortunately, tax directors sometimes neglect to focus on the contribution they can make toward capturing the full value of the M&A deal. In an M&A transaction, the effective realization of synergies, mutual support capabilities, and complementary traits is critical to success. It stands to reason that underlying business processes usually must be changed to achieve these post-transaction advantages. The tax department can play an important role in accomplishing the transformation, particularly helping reduce the tax cost of the process changes. Yet we’ve found that tax directors often underestimate the speed and scale of business process changes. As a result, these changes often are implemented without forethought to the tax consequences and sometimes with significant adverse impact to the business.
Consider this example of leveraging business process planning with tax planning: As part of an M&A transaction, two of three facilities will be closed; the third will stay open and add employees. Your company’s operations group may not think to contact the tax director to discuss possible tax ramifications or opportunities. Yet if they did, your tax function may be able to add significant value. For example, if your operations group must choose which facility will remain open, your tax department may be able to quantify the relative state tax burdens of the locations that could be added to the deliberations. As soon as this choice is made, but before staff increases are announced, your tax director may be able to help negotiate a training grant from the city or state where employment will grow. Furthermore, your tax team may be able to advise the operations group on how the proposed facility shutdowns could impact your company’s global transfer and advance pricing agreements.
This example represents just one reason why you need to make sure that the tax director has a seat at the table as soon as possible, preferably before the transaction closes, if such process synergies are crucial to the deal metrics. Smart companies begin to plan for and implement business process changes immediately, and unless your tax director is aware of them in their infancy, you will not be able to add value from the tax side.
Plan to juggle three balls at once
Keeping tabs on business process changes while simultaneously dealing with tax technical and tax department operational issues will be a challenge. Many tax directors are tempted to leap into the fray, working later and later each night. We have frequently seen this approach fail, creating a time of constant worry that something important is missing, no matter how hard the tax director works.
Our experience suggests that a better approach is to take time at the outset of the transaction to plan work efforts in the most detailed fashion possible. This will require extra effort at a stage when your tax department’s time will be a very precious resource; however, every hour spent planning in advance can eliminate numerous hours of wasted effort later.
A detailed, actionable work plan should cover important aspects of tax technical, tax department operations, and business process changes. This disciplined approach will help discipline your tax department to prioritize efforts over the coming months and highlight, early on, any tasks that your department simply does not have the proper resources to address. This way, they can obtain external assistance, such as temporary staff, as needed. Indeed, since overstaffed tax departments are a rarity today, calling for external assistance for the heavy post-transaction workload may be critical to their success.
Pull it all together
Despite the chaos and multiple priorities that follow an M&A transaction, it is possible to manage and thrive. Start by remembering the following critical tactics for your tax function:
- Prepare your tax director to leave their comfort zone — do what needs to be done rather than what is familiar.
- Ensure that a comprehensive, actionable work plan is developed as soon as possible.
- Be sure the department stays abreast of the tax technical issues of the transaction.
- Don’t allow operational issues to be neglected, especially SFAS 109 and FIN 48.
- Make sure the tax director has a seat at the table when business process changes are discussed.
- And even though it goes well beyond tax, it’s still good advice: take care of your employees — so they can take care of you.
Take care of the people
The people in your tax department may be as concerned about the outcome of the transaction as anyone else in your organization. Because they will have much less information than executive management, they may assume that their bosses are withholding bad news, which could affect their performance or cause them to look for a new job. For example, if you do not explicitly tell them that the tax department will be staying in your city, they may assume a move to the other company’s location is imminent. If you do not tell your top tax director that they will be the combined enterprise’s tax director, they may anticipate being demoted below someone from the other company. And, if you do not expressly reassure your employees that they will keep their jobs, they may see themselves as pending casualties of the transaction’s synergies. This stress is often amplified by recruiters calling your tax staff, possibly spreading rumors of disaster, as soon as the transaction is announced.
What can you do? First, provide as much information as you can to your staff as soon as you can in an open and frank manner. Don’t give in to the temptation to downplay bad news; you’ll earn and keep more respect through honesty and candidness. You and your tax leader will need to pay extra attention to the employees of the tax department during this anxious time, or valuable contributors may leave just when you need them most.
Tackle technology issues quickly
Companies involved in an M&A transaction may have different information systems, sooner or later forcing a move to a single platform. In this situation, the tax leader will need to make sure that the new or changed platform can deliver all of the data needed to fulfill tax reporting, compliance, and other record retention requirements. Because important deadlines will arrive rapidly and tax authorities and regulators generally don’t look kindly on missed filing deadlines, technology integration should be a priority. Technology – which can be tax process enablers – should also be regarded positively. It is highly unlikely the tax department personnel will be increased to meet the new organization’s needs; thus, faster, more dedicated tax-process solutions can ease the pressure.
Evaluate the new department’s needs early
From the beginning, start thinking about how your new department should be constructed, how it will be staffed and resourced, and how you can keep the high talent people and adopt the most effective practices from the acquired company. Because your tax department and that of the other company will be mutually dependent on each other to meet filing requirements, facilitate a positive mutual relationship from the outset. Within your company, build departmental bridges as early as possible — before talk of post-closing chaos is more than just an idle rumor.
Reach out and share the labor
After the completion of a transaction, communications and coordination between two tax departments is critical. Having these groups working separately or in isolation can lead to damaging levels of duplication, spread valuable resources too thin, and present significant obstacles to completing the massive amount of tight-deadline work that needs to be accomplished.