module 4.2 inorganic growth and corporate financial strategies · pdf fileinorganic growth and...

Inorganic Growth and Corporate Financial Strategies

Module 4: CFO and Business Growth

2

Sorachon Boonsong

Partner

Baker & McKenzie Ltd.

� Introduction: Reasons for M&A

and Global Trends

� Inorganic growth models

� Due Diligence

� Red Flags

Outline:

� Inorganic growth models

� Forms of M&A

� Tax considerations

� Responsibilities and Liabilities

of Management

� Post M&A

3

1.Introduction: Reasons for M&A and

Global Trends

1.

Latest M&A Trend

Source: Baker & McKenzie M&A Index Q1/2016

M&A in 2015

6

Source: Mergermarket

Top 5 Drivers for Cross-Border M&A

7

Source: Report of FT Remark (research from the Financial Times Group) and Mergermarket combined with experiences of Baker & McKenzie partners from our offices around the world, 2014.

in billions of dollars

Foreign Direct Investment vs. Outward Investment from Thailand

8

Source: Bank of Thailand

What makes a country an attractive destination for M&A activity?

9


Based on your market perception and previous experiences, which

factors best facilitate cross-border acquisitions?

10


• Want to focus on the company’s core competence

• Wants to keep to its original position/branding

• Want to keep the technology to itself, particularly if it has

strong R&D

Why some companies do not do M&A?

11

strong R&D

• Avoid cultural clash

2.Inorganic Growth Models

2.

Horizontal Mergers

• is a merger for the benefits of production capacity or

marketing

• between companies that manufacture/sell the same type of

products/services

• e.g. • e.g.

13

Vertical Mergers

• is a merger between companies in the same business, but at

different production level (i.e. upstream + downstream)

• e.g.

14

Conglomerate Mergers

• is a merger between companies with no relationship to each

other

• e.g.

15


Singha EstateRASA

45.58% 54.42%

Pinijchob

Group

Other

Shareholders

56.97%31.36% 5.32% 6.35%

Khun SantiGroup

Singha Property Management Group

16

Santi Buri Ltd.

99.99%

Singha Property Development Ltd.

Bhiromphat Ltd.

Max Future Ltd.

99.99%

99.99%99.99% 99.99%

S Bright Future Ltd.

Real Estate Business


Pinijchob

Group

Other

Shareholders

Singha Estate

Khun Santi Group

Singha Property Management Group

56.97%31.36% 5.32% 6.35%

17

99.99%

Singha Property Development Ltd.

Bhiromphat Ltd.

Max Future Ltd.

99.99%

99.99%99.99% 99.99%

Real Estate Business

EBTEBT

Liquidate Liquidate

Santi Buri Ltd.

S Bright Future Ltd.

3.Forms of M&A

3.

Shares Deal

A Co.

100%

Seller Buyer

Acquire Shares

new shares

Assets/Business Deal

Seller Buyer

AcquireAssets

Amalgamation

A Co.

B Co.

+

Consideration

Factors

• Seller’s intention

• Liabilities

• Financial impacts

• Tax loss utilization

Choosing the Right Form of M&A

A Co.

Business

and/or

existing shares

19

Asset / Business

Assets

C Co.

• Tax loss utilization

• Timing

• Transferability of

licenses, assets,

contracts and

employees

with Joint Venture without Joint Ventureor

Share Acquisition Business/Asset Acquisition Amalgamation

Co. A Co. Bcash

Shareholder AShareholder A

Co. A Co. B

Major Forms of M&A in Thailand

1.1 Cash payment

1.2 Share swap

1.3 Share swap + share purchase

in cash

1.4 Holding Company Formation

Co. A Co. B

Co. A Co. B shares swap

Co. AShareholders A+B

2.1 Cash payment

2.2 Payment in kind (e.g. shares)

2.3 Two-step - share acquisition

followed by business/asset

transfer

Co. A Co. B

Co.B

Co. A + Co. B = New Co

3.1 Public Companies �� The

Public Limited Companies Act

3.2 Limited Companies �� The

Civil and Commercial Code

3.3 Proposed new law

�� A+B = A or B

Dissolution

20

1. Share Acquisition

Advantages

� Fast and popular

� Buyer can operate business right

away

� No need for new licenses

Disadvantages

� Buyer receives all rights and

liabilities of target

� Potential tender offer

requirement in the case of listed

company (Note: when crossing the

21

� No need for new licenses

� No need for employees’ consent

� No transfer tax/fee other than stamp

duty

� Loss carried forward can be used

company (Note: when crossing the

trigger points of 25%, 50%, 75%)

� Third party consent may be

required

� Assume all tax liabilities

Disadvantages

� Need to apply for new licenses

� Need to create goodwill and reputation of the new company

� Problem in the employee transfer to buyer

� Problem of pending litigation cases in court or debt transfers

2. Business/Asset Acquisition

Advantages

� The buyer is not

liable for all

liabilities of the

target (Cherry

Pick)

� In the case of public companies, partial transfer of important

businesses/ total transfer of businesses require ¾

shareholders resolution

� In the case of listed companies, there may be reporting

obligations on disposals or acquisitions of assets to

SEC/SET or may be deemed as connected transactions.

� Transfer tax/fee payable

� Tax loss not transferred

� Liquidation process may be lengthy (in case of EBT)

22

� Consideration of

assets can be

issuance of new

shares

Disadvantages

� Time consuming

� More legal steps and

complications than other methods,

i.e. prior to amalgamation

3. Amalgamation

Advantages

� Save transfer fee in case of land

and building transfers

� Tax exemption to shareholders

obtaining shares in new entity.

� Tax loss terminated

� Exposure to tax audit upon

amalgamation

23

� Transferability of licenses (except

when not permitted by law)

� Transfer of rights and liabilities

upon amalgamation

4.Tax Considerations

4.

Tax Items Tax Base Share Deal Asset Deal EBT PBT Amalgamation

CIT net profit 20% 20% exempted 20% exempted

VAT purchase price - 7% exempted exempted -

SBT purchase price - 3.3% exempted exempted exempted

WHT purchase price 15%(1) 1%(2) exempted 1%(2) exempted

Transfer Fee assessed price - 2% (land); 1% (lease/mortgage) -

Tax Benefits and Tax Burdens

25

Transfer Fee assessed price - 2% (land); 1% (lease/mortgage) -

Stamp Dutydepend on type

of instruments0.1%

depend

on assetsexempted exempted exempted

Tax Loss - benefit not transferred to purchaser terminated

Tax Audit -not

triggered

not

triggeredtriggered

not

triggeredtriggered

Remarks: (1) WHT not required if both seller and purchaser are Thai companies. For cross border case, WHT can

be exempted or reduced by DTA.

(2) Only for land and building.

Outbound Investment

China

Worldwide tax @ 25%

Capital gain is taxed

10% dividend WHT Hong Kong

Territorial tax @ 16.5%

No capital gain tax

No dividend WHT

Vietnam

Thailand

Worldwide tax @ 20%


10% dividend WHT

25%

China

16.5%

Hong Kong

26

Vietnam

Worldwide tax @ 25%


No dividend WHT to corporate

shareholders

Indonesia

Worldwide tax @ 25%


20% dividend WHT

Singapore

Modified territorial tax @ 17%

No capital gain tax

No dividend WHT

Malaysia

Modified territorial tax @ 25%

Only real property capital gain is taxed

No dividend WHT

10% dividend WHT Hong Kong

20%

Thailand 25%

Vietnam

20%

Malaysia17%

Singapore

25%

Indonesia

• Corporate income tax:

Singapore 17% Hong Kong 16.5% Malaysia 25% Myanmar 25%

• Tax deductibility on expenses

Tax Liabilities in Offshore Countries

• Certain types of income may be tax exempted (capital gains or foreign-

sourced income)

• Certain types of investment may be tax-favored (like BOI in Thailand)

27

Tax Liabilities on Subsequent Exit from the Investment

• Subject to Thai corporate income tax upon the net profit at the

normal rate tax of 20%

• Sales of shares (capital gains) through an offshore holding

company will not trigger Thai tax

28

company will not trigger Thai tax

• Use of IHQ may provide exemption on capital gain

� Directly

invest in an

Operating

Company

� Invest

through an

offshore

Holding

Company

� Invest

through an

International

Headquarter

Thai Company

IHQ

Investment in an Operating Company through a Holding Company(ies)

� Invest

through a

Venture

Capital

VC

Offshore

Thailand

Holding Company

Operating Company

29

IHQ VC

Operating Company*

(for Qualifying Businesses only)

Investment in an Operating Company through a Holding Company(ies)

Investment Option Tax on Dividend Tax on Capital Gain

Direct Investment Exempted by Royal Decree

No. 442 (subject to certain criteria)

20% CIT on the gain from sale of

shares in Operating Company

Investment

through an

offshore Company

May or May Not Be Exempted by

Royal Decree No. 442 (subject to

certain criteria)

No CIT in Thailand on the gain

from sales of shares in Operating

Company

30

offshore Company certain criteria)

Investment

through an

International

Headquarter (IHQ)

Exempted by Royal Decree

No. 586 for dividends paid by

Operating Company and IHQ

(15 years)

Exempted for the gain from sale

of shares in offshore Operating

Company (15 years)

Investment

through a Venture

Capital (VC)

Exempted by Royal Decree

No. 597 for dividends paid by

Operating Company and by VC

(10 years)

Exempted for the gain from the

sale of shares in Operating

Company and in VC (10 years)

5.Due Diligence

5.

confidential information

correspondences with authority

Necessity of Due Diligence for Listed Companies

32

with authority

disclosed information

Se

lle

rS

ell

er

Pu

rch

ase

rP

urc

ha

ser - require all information

that is not already disclosed as required by the MOC, SEC and SET

- require all information

that is not already disclosed as required by the MOC, SEC and SET

Arguments relating to Information Disclosure in a Due Diligence

33

“all material information is already disclosed to the public pursuant to SEC and SET’s requirements”

“all material information is already disclosed to the public pursuant to SEC and SET’s requirements”

Pu

rch

ase

rP

urc

ha

ser

e.g.

- internal documents relating to tax and compliance issues

- significant correspondences with the authority (regulators)

- etc.

e.g.

- internal documents relating to tax and compliance issues

- significant correspondences with the authority (regulators)

- etc.

vs.

• Good practice:

good preliminary

information for a

due diligence

Non-disclosure may

affect:

• pricing adjustment

• retention

Note:

1. Certain information may be

deemed insignificant to the

target, hence non-disclosure,

but may be significant to the

acquirer in relation to post-

acquisition business

Recommendation?

• But always

recommended to

conduct a due

diligence

• retention

• warranty

• indemnity

acquisition business

operation.

2. No due diligence on some

major acquisitions due to:

a) time constraint

b) sensitivity of the deal

c) familiarity between the

acquirer and the target

34

6.Red Flags

6.

1. High level management have complete and utmost power.

2. Board of Directors is inefficient.

3. The remuneration of high rank executives are tied to company’s income or share

price of company.

4. Audit committee that lacks the qualification to be the audit committee.

5. Too complicate organizational structure.

Red Flags – Organizational Structure

5. Too complicate organizational structure.

6. Frequent changes of senior management.

7. The management is not co-operative with outside auditors or do not accept the

proposal or recommendations of outside auditors.

8. The use of many financial institutions to achieve various objectives.

9. The conflict of interest among the management.

10. Have a bad reputation regarding management in the business sector.

36

1. The business have or is being examined by the regulators (i.e. SEC, IRS).

2. The financial environment for the business sector is not good.

3. The company is the target for buying or merger and acquisition.

4. Giving information to auditors in the last minute.

5. Have items that are hard to audit and examine.

Red Flags – Business and Legal Environment

6. The profit of the business contradicts with that of the business sector.

7. The legal environment that is not supportive of the business.

Red Flags – New Trend

1. Competition law (anti-trust) issues

2. Corruption and bribery issues

3. Human right issues

37

7.Responsibilities and Liabilities of Management

7.

Buyer Company Seller Company

1. How would the acquisition of shares/assets

match with the strategies and goals of the

business?

1. How would the disposal of shares/assets match

with the strategies and goals of the business?

2. How would the acquisition make the buyer company gain benefits for the following issues?

• Synergy

2. How would the acquisition make the seller company gain benefits for the following issues?

• Find business partner

10 Commandments for Managementwhen doing M&A

• Synergy

• Economy of Scale

• Cost Reduction

• Economy of Scope

• Distribution Channel

• Financial benefits and Opportunity for

fundraising at a low cost

• Find business partner

• Decrease risk in doing business

• Gain Financial Benefits

• Result in cash flow increase for investments or debt payment

• Gain opportunity to sell the existing business

for the purpose of restarting a business with more potential

39


3. What form of M&A (acquisition) would you choose and why?

3. What form of M&A (disposal) would you choose and why?

4. Who conducts legal, tax, and operational due diligences and what type of due diligence?

4. Seller needs to cooperate in which aspect of the

Due Diligence? In disclosing material information

to the Buyer in the process, would there be any

potential damage to the Seller if the deal does


potential damage to the Seller if the deal does

not become successful. Should there be a break fee?

5. What method of specification of selling and

purchasing price would you use? Is there any

comparison of price, benchmarking with market

price, negotiation process with other interested

seller by hiring financial advisor, accountant,

legal or tax advisor who have the expertise to

assist in the process? Is it a fair value as it should

be? Who bears the burdens on tax, fees,

expenses? Who bears the whole transaction cost and future tax expense?

5. How do you specify selling and purchasing price?

Is there any negotiation with other buyers? Is the

price the most beneficial price for all other

shareholders? What kind of tax burden is the

best in the view of the seller? To what extent can

there be a way to decrease or manage tax burdens or do the tax planning?

40


6. What are the post M&A (acquisition) plans

that will make the acquisition successful?

6. What are the post M&A (disposal) plans?

7. Are the negotiation and making of M&A

contract jointly conducted by the outside

management and advisors (legal, finance,

accounting, and tax)? To what extent is there

7. In contract negotiation, who drafts the

contract? Is there any issue in the contract

that would involve outside management or

advisor in the contract and risk negotiation?


accounting, and tax)? To what extent is there

a contract clause that mitigate potential risks,

including amount of money, time frames, and

Material Adverse Change (“MAC”)

advisor in the contract and risk negotiation?

To what extent can the contract prevents

risks? Do the amount, time frames, MAC comply with the terms of contracts?

8. Is there any pre and post acquisition

operations, which are legal requirements that

may render the M&A deal to break (e.g.

Competitions Act, Insider Trading, Non-

Compete, Confidentiality clauses)?

8. Does the disposal of shares/assets need pre

or post approval, which may render the M&A

deal to be cancelled by the effect of law or

prohibit insider trading, competition, or

disclosure of confidential information?

41


9. There should be complete disclosure to

shareholders, including steps for price

negotiation, benefits and shortfalls, including

risks, in order to gain sufficient information for

decision making. This is whereby considerations

may be made in reference to the other buyers in

similar businesses.

9. In order to ensure that the selling shareholders

receive full benefits from the sales, complete

disclosure must be made to the shareholders to

provide sufficient information for decision

making. This is whereby consideration may be

made in reference to other sellers with similar

businesses.


similar businesses. businesses.

10. The Board should be well informed of and

acknowledge opinions and information from the

management, financial advisors, accountant, tax

advisors with expertise in such transaction. The

Board has sufficient time in considering the

information before making the purchase. Such

decision making should be for the benefits of the

company and with no direct or indirect interest

(do not forget the Business Judgment Rule)

10. Similar to the Buyer side/ Do not rush to

negotiation without sufficient information

42

8.Post-M&A

8.

Post merger management is the absolute key

to success – the deal is won or lost only after

the deal is done

Integration Challenge

Sir Brian Pitman

44

Key Challenges for M&A Failure

1. Integration too slow, synergy not fully realized

2. Business momentum disrupted

3. Opportunity lost to create a new competitive company

Common integration errors:

• Inadequate integration planning

• Lack of programmed leadership

• Lack of a formal and fast

45

• Lack of a formal and fast decision making process

• Lack of executive alignment on merger rationale

• Too much time spent on organization politics

• Loss of focus on everyday operations

• Merger synergies not driven through quickly enough

• Customers get forgotten

Source: Deloitte

Key Issues to Consider for Post-M&A

1. Key employees retention

2. System and process integration plan

3. Legal Day 1 & Operation Day 1

4. Overcoming cultural differences (if any)

5. Realizing financial synergies

6. Financial/accounting impact if M&A is not successful

46

6. Financial/accounting impact if M&A is not successful

Commencement of Integration Process

M&A Strategy

Industry analysis, Scenario planning, Target identification, Entry strategy, Valuation1

Target Screening

Target profiling and analysis, Initial due diligence, Early synergy review, Initial tax

structuring, Approval strategy, Integration consideration

2

Transaction Support

Due diligence, Negotiation, Pricing, Financing strategy, Completion mechanics3

47

Due diligence, Negotiation, Pricing, Financing strategy, Completion mechanics

Synergy work, Integration planning, Operational cost reduction opportunity review

3

Integration

Program blueprint development, Program design & mobilization, Benefits case

development, Benefits realization, Change management & communication,

Transition strategy and Day 1 management, Full operational integration

4

Transformation

Strategic re-direction, System transformation, Marketplace redefinition, Product and

service innovation, People transformation, Vendor due diligence

5

Source: Deloitte

A Telco in SEA - unsuccessful

• Government owned fixed line Telco acquired a mobile business with different culture practiced;

• Poor planning for integration and only thought about post acquisition;

• Integration director appointed was weak and did not understand the mobile business, and could not bring the teams together;

• The integration director was not full time and had her own day to day responsibility that lead to delays

Live Examples

A Bank in SEA - successful

• Identified the integration issues at the deal evaluation stage;

• Clearly articulated the plans even before the transaction was consummated;

• Appointed an integrator during deal execution who continued to lead the integration;

• The integrator was the COO who knew banking well and relief him of his duties to concentrate full time on integration;

The integration director was not full time and had her own day to day responsibility that lead to delays in meeting the plans;

• Governance structure was not effective with steering committee members not fully appraised or aware of the issues and the consequences;

• Mobile customers were unhappy with services and Telco started to lose customers and market share to competitor;

• Employees too were not integrated well and left to join competitor;

• Acquisition strategy did not meet its objective with significant losses incurred post acquisition.

48

Source: Deloitte

well and relief him of his duties to concentrate full time on integration;

• Proper governance set up with board of directors taking full responsibility;

• Project Management team was appointed to provide independent assessment of integration and brought in SMEs whenever required;

• All integration issues were escalated promptly to steering committee and resolved by either working committee or by the board;

• Integration was completed within a year as planned with minor hiccups.

49

Q & A

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