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How to make the most of M&As

Posted on Mar 6, 2016

Being involved with a successful acquisition is very rewarding for both the acquirer and their advisors. However, there can be many traps along the way.

Before any agreement is signed, consideration should be given to exactly what is to be acquired. Often, vastly different tax and commercial outcomes can hinge on the choice of whether to acquire an entity or its business and assets.

Acquiring the assets

For simple acquisitions, a purchaser may prefer to acquire the business (and/or assets) directly. This will often have the advantage of not taking on the risk of the vendor’s history or undisclosed liabilities. If this path is chosen, critical issues for advice will generally include:

  • Allocation of the purchase price as between different assets (which can have significant tax implications); and
  • Consideration of income tax, GST, and duty issues (and land tax where real estate is involved) on an asset by asset basis.

In some cases, there will be various options for effectively acquiring control of assets, each having similar commercial results, but with some options having a significantly greater tax or duty impost than others.

Acquiring the entity

For certain acquisitions, purchasing the relevant entity (or entities) may be the only practical alternative. For example, this may be the case where the target business is run through various interrelated entities or where key existing contracts may be too difficult or costly to assign.

Such an acquisition usually involves greater reliance on vendor warranties and indemnities, which can bring with it greater risk. To reduce this risk, it is important to consider exactly what due diligence should be performed before a final agreement is signed.

The tax consolidation regime may also apply to the vendor and/or the purchaser. This may require a complex tax cost resetting exercise, clear exit arrangements and entering into new tax sharing agreements. These matters can impact on the future tax deductions available to purchasers as well as on the risk that it takes on regarding possible tax liabilities. Again, in order to obtain the best possible outcome, these are matters that should be considered before the final agreement is executed.

Structuring the consideration

Extra value may be unlocked through optimised structuring of the consideration.

For example, a vendor may be willing to accept a lower price if their tax liability can be minimised. This can be particularly relevant where there is a potential to acquire an entity in a scrip exchange (aka a share swap) or where an earn-out arrangement is contemplated.

Understanding the vendor’s position can enable a win-win deal to be proposed with increased chance of success for the purchaser.

If cash consideration is to be involved, then it is important to consider how it should be sourced as this may impact on the availability of any deductions for interest on borrowings.

James Donoghue is practice leader of Mergers and Acquisitions at Rigby Cooke Lawyers.