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1
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
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.
Based on your market perception and previous experiences, which
factors best facilitate cross-border acquisitions?
10
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.
• 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
Conglomerate Mergers
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
Conglomerate Mergers
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%
Capital gain is taxed
10% dividend WHT
25%
China
16.5%
Hong Kong
26
Vietnam
Worldwide tax @ 25%
Capital gain is taxed
No dividend WHT to corporate
shareholders
Indonesia
Worldwide tax @ 25%
Capital gain is taxed
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
Buyer Company Seller Company
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
10 Commandments for Managementwhen doing M&A
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
Buyer Company Seller Company
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?
10 Commandments for Managementwhen doing M&A
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
Buyer Company Seller Company
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.
10 Commandments for Managementwhen doing M&A
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