International Tax

At the right price.

How a disciplined approach to
international tax can drive M&A value

Audit. Tax. Consulting. Financial Advisory. 1

 At the right price.

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The four words that matter most
In the last few years there has been a remarkable resurgence of mergers
and acquisition activity, and in particular cross-border M&A. Despite
temporary market concerns, globally mergers are up 31% in the past
two years, and cross-border M&A transactions are on the rise in North
America, Asia and Europe.

Even in turbulent market conditions the market continues to be driven

by competition, where cash has replaced stock as the consideration of
choice. The importance of executing acquisitions that are grounded by
sound fundamentals has never been higher - for your leadership team
and indeed for you.

While temporary market concerns may have slowed the recent

buying frenzy, the long-term benefits of acquisitive growth will
inspire multinationals to continue their aggressive pursuit of global
opportunities. In fact, recent liquidity conditions may, as financial buyers
consider market factors, result in more competitive opportunities for
multinational corporations. This may put even more emphasis on making
a deal - At the right price.

It is, however, impossible to truly know the right price for a cross-border
merger or acquisition without factoring in the international tax and
treasury considerations of a transaction. This booklet explains how to
explore the international tax issues and opportunities early in the process,
which can help you consider the right price and pursue a deal that works.

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Big Deals =
Big Opportunities + Big Risks
Despite some recent setbacks, the volume and size of deals and
transactions remain strong. According to Thomson Financial, deal
volume to September 2007 (YTD) in the US was $1,282 Billion,
compared to $567 Billion in 2003 (full year). Though the market
has cooled in some areas, most notably in private equity due the
tightening credit markets, multinational corporations appear to
remain active, perhaps after being priced out of the market in
recent years.

And an increasing percentage of the largest M&A deals is comprised

of cross-border transactions. Of the top 100 deals in 2006, 26 had a
multinational dimension, compared to only 14 in 2005.

Where an M&A transaction has complexities of scale and a cross-

border element, having a clear M&A vision that’s aligned with your
business strategy is critical. But this is only the beginning because
vision alone won’t create real value unless it’s executed effectively.
That means tightly managing literally hundreds of details in
multiple countries that have to line up for the deal to generate the
expected benefits.

And these inherent difficulties are made even more challenging by

the pressure to move quickly to fend off competitive threats.

Keeping international tax planning as an integral aspect through

all stages of the transaction can contribute to a deal’s success. In a
cross-border M&A, almost every decision made -- in screening and
due diligence through valuation, HR, operations and post-merger
integration, will have international tax implications.

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 M&A from start to finish

The M&A lifecycle begins with a search for answers to a host of questions: How
to stay ahead of a new competitor? How to reduce costs? How to optimize
revenue? Where to manufacture? Where to sell what and to whom? How to
reduce costs even more? What are the best acquisition targets? Where are the
hidden pitfalls? How to structure the deal? How to execute? What’s the right
price?

The difficulty of finding the right answers to these questions is compounded

by the fact that your competitors are inevitably also asking similar questions.
In particular, all players focusing on the same target, can lead to protracted
struggles, with the eventual winner paying considerably more than it had
originally planned. In this competitive environment, it is vital to anticipate
potential hazards and evaluate the target thoroughly and accurately from a
long-term strategic, after-tax profit perspective.

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Strategy

If you’re going to do it, do it right.

Many C-level executives understandably find themselves preoccupied with
the next deal. Making a large acquisition is an extraordinary event that can
dramatically alter a company’s performance — and a decision-maker’s career
— for better or worse.

The odds of a “better” outcome shorten considerably when international

tax considerations are brought into the discussion at the earliest possible
opportunity– ideally when potential targets are being screened, but certainly no
later than during the due diligence process. The international tax considerations
are a significant factor in any cross-border transaction and ignoring them can
have serious consequences for deal-makers, for example, winding up with a
40% global tax rate when the income tax rate that was envisaged was 28%.

While factoring in the international tax consequences in itself doesn’t turn a bad
acquisition into a good one, being cognizant of the consequences can help you
avoid deals that are unworkable or over-priced. Below are some of the lessons
that can be learned from successful deals:

Complement the corporate strategy

• Align your acquisition strategy with corporate and business unit strategies
• Identify target screening criteria that will create real value for your company
• Regularly screen sectors for firms that fit screening profiles
• Understand your company’s global tax structure, treasury profile and effective income
tax rate across jurisdictions

Clearly identify the sources of value

• Identify sources that will drive the focus of the team during due diligence
• Perform thorough financial, tax, legal, operational, strategic and technology due
diligence
• Execute the diligence objectively, effectively and quickly

Pay the right price

• Identify and understand both the commercial and tax risks
• Use international tax structuring as a competitive advantage
• Realistically calculate the maximum purchase price that can be paid
• Compare the price with the expected synergy
• Be willing to repeat the analysis and update targets as often as necessary in response
to changing competitive and market conditions or effective income tax rates
• Calculate all prices and profit margins based on after-tax figures, using the correct core
data, rather than a guesstimate.

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 Factors that will need to be considered:

• Whether the target company has a global tax, treasury and finance structure
that serves its business needs.

• The degree to which that structure complements your existing strategy, e.g.
business treasury, tax objectives, etc.

• The possibility of developing a global strategy to achieve all of these

objectives.

• Whether the target regularly repatriates cash, and if so, how that cash is
used, and whether the repatriation strategy operates efficiently?

• The amount of cash the target company has overseas and whether its
treasury strategy complements that of your own organization?

• The target company’s effective income tax rate and how that compares with
its competitors and your own company.

• Whether the target has recently been audited or subject to any penalties.

• The compatibility of the target’s overall global tax and reporting structure
with that of your organization and the extent of the work required to
integrate the two.

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Target Screening and Due Diligence

Look (hard) before you leap

One of the biggest dangers in any M&A activity today, and one that is only
exacerbated by a fierce competitive environment, is the tendency to see more
value in an investment than actually exists. Clear analysis of the accounting and
global tax positions of an acquisition target is therefore crucial if you are to avoid
exposing your company and yourself to unnecessary tax risk.

The importance of disciplined screening and due diligence may require importing
extra resources – even the best finance and tax departments may not have
the experience and time to delve into the necessary minutiae. Effective M&A
professionals can find openings to create value but will also not be afraid to say
“no” swiftly and decisively to a deal that is unlikely to meet your requirements.

At the beginning of the due diligence effort, set goals and targets for
analysis and be sure to cover at least 90% of them.

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 Proper execution of global tax and treasury functions can
enhance the value inherent in an acquisition.

Recurring P&L Considerations

Efficient Leverage Structure
• Post-transaction rationalization of
legal entity structure; fiscal unity and
efficient use of tax attributes
• Integrated operational strategies with
tax opportunities
• Global income allocation (state,
local, federal, international); identify
activities to be conducted in low tax Measure of Success
jurisdictions; centralized offshore
treasury function • Reduced effective tax rate
• Transfer pricing and cost-sharing • Increased EPS
analysis • Enhanced cash flow
(repatriation and redeployment)
• Minimization of transaction
One Time P&L Considerations taxes
• Analyze alternative structures to • Tax-efficient exit strategies
minimize/defer income tax, transfer
tax and capital tax
• Accelerate/utilize favorable tax
attributes of target
• Minimize transaction cost;
- Golden parachutes
- Transaction cost
• Tax efficient disposition of
unwanted assets
• Tax benefit restructuring/integration
costs

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Transaction Execution

Structuring deals with strategy

in mind
By focusing on where you’ll gain efficiencies and value to justify the price, your
accounting experts will evaluate the synergies expected to result from an M&A
transaction. How much overhead will the deal really cut? How will additional production
capacity drive opportunities in other jurisdictions? What will you gain from a combined
sales force? How will you drive new revenue and reduce costs?

But the workability of a cross-border transaction often hinges on its international tax
consequences, especially when its successful execution requires cash to be deployed or
repatriated to where it is needed. Without the right tax strategy, you won’t know how
to create the optimal combined structure to deliver the maximum benefits. And you
won’t be able to move money and deploy cash the way you need to; for example, to
service debt associated with the deal. The tax structure has to fit not only with how you
intend to operate the combined business, but also with your Treasury needs.

There is no substitute for modeling. Intuition is not always correct. Modeling highlights
the unique cross-border tax and treasury issues that will arise, so that the two pieces
of the transaction create the desired synergies. This may include retaining and utilizing
positive global tax attributes and eliminating the negative ones. This may also include
minimizing future taxation of global “synergistic” income.

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 The plan must be executed

After an extensive nine-month process, a U.S.-based multinational operating

in the consumer products industry expanded its top line by 80% and increased
global reach through the acquisition of a European-based multinational. The
demanding transaction required in-depth analysis by the operational, legal and
finance teams of the acquiring company. With a price of seven times EBITDA,
the transaction factored in significant after-tax earnings and cash flow to service
debt and fuel additional investment.

An effective tax rate of 31%, coupled with a flexible global cash mobility model
was included in the financial projections that supported the successful bid and
requisite return on investment. This was based on the success of post-acquisition
integration planning identified during the due diligence and structuring phases.

The planning included:

• Restructuring offshore subsidiaries allowing for the repatriation of foreign

earnings to be offset by Foreign Tax Credits (FTC).

• The “grouping” of entities in common jurisdictions for consolidated filings

and related local country planning.

However, various demands on both organizations took the focus away from
completing these and other actions, and the global effective tax rate spiked
to 41% in the year following the transaction. This put significant strain on
earnings for the company, and impacted the organization’s ability to grow and
compete in new markets for deals. Additionally, the political clout of the M&A
group within the acquiring company was curtailed in the months following
the transaction.

The deal didn’t fail – post-acquisition execution failed.

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Integration

Beyond Day One

Unfortunately, many companies fall short when it comes to following
through on merger integration – especially in the context of the international
tax issues. Because the structuring documents will lay out a timetable for tax
matters that must be attended to after the transaction is completed, lack
of awareness is rarely the problem. Rather the key people who drove the
acquisition tend to become involved with other issues—perhaps the next
deal—and important post-merger steps don’t receive the attention they
require.

Continuity across the entire life cycle of a major transaction is therefore key.
A well-managed integration plan, which calls on experienced tax resources
can go a long way towards exploring all necessary actions for the ultimate
value that you expect.

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 Using the right tools…

Geographic reach

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Previous
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Eu
industry
M&A Strategy/Target Screening based
experience

Industry
Due Diligence

Knowledge
Depth and Deal Structure and
breadth knowledge
Valuation
of M&A
Tax Planning
services
Human Resources
Operations Integration
Systems Integration

Geography frequently drives much of the agenda in cross-border deals. To get to

the right price, you’ll need tax and finance professionals in every country in which
you will be operating to provide vital and timely advice. More to the point, you need
experienced people who can hit the ground running — otherwise you’ll lose valuable
time and run the risk of mistakes that could have been avoided. This is especially
critical during the due diligence, structuring and integration phases of the deal.

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Integration

…To get it done

The potential rewards — and risks — of M&A are the justification for the high level of
commitment that such transactions inevitably demand.

The disciplined approach that M&A calls for admits of no corner cutting and will
require a major team effort, with the right people involved throughout the process, all
working towards the same clearly defined goals. And, as such a disciplined approach
often requires resources that few companies have available in-house, at some stage in
a transaction you are likely to need external support.

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 No rest for the weary
Despite their glamour and magnitude, many mergers and acquisitions fall far short
of delivering the promised results -- usually because the acquiring company pays too
much. And though many businesses today are better prepared to capture synergies
following a merger, some combinations that seemed like “a good idea at the time”
ultimately destroy value, damage brands and compromise customer relationships.

Having the right international tax strategies in place can go a long way to increasing
your chances of success. Awareness of the international tax issues is an essential
component in establishing the right price – and making sure you have access to the
cash you’ll need to operate and service the deal. The most astute companies bring
a tightly structured approach to their merger and acquisition activities that involves
international tax knowledge at every step in the M&A process.

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 About the International Tax practice of Deloitte Tax LLP

The International Tax practice of Deloitte Tax LLP helps to align global effective tax
rate reduction and efficient global cash utilization strategies with your overall business
objectives and the way your company operates. For more information, please visit
www.deloitte.com/us/tax or contact your local Deloitte Tax professional.

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