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1
PricewaterhouseCoopers LLP PwC
Private Equity ClubCorporate SimplificationTuesday 19 September 2006
2
PricewaterhouseCoopers LLP
Agenda/Contents
Section 1- Complexity: WhatComplexity: What’’s the issues the issue
Section 2 - Operation Costs and Complexity
Section 3 - Structural Cost and Complexity
Section 4 - Conclusions
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Slide 3PricewaterhouseCoopers LLPSeptember 2006
Why is Complexity Reduction on the Agenda?
Regulation -
Sarbanes Oxley and IFRS
Costs – More value for less costMerger integration
Governance & Legal –Speed and visibility of responses
Increase Tax regulation
Information –Decision support
Processing economiesControl
Gordian Knot
Section 1:
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Slide 4PricewaterhouseCoopers LLPSeptember 2006
Trends in Reducing Complexity….…..over the last 10 – 15 years we have seen…
Toll Manufacturing
& Servicing
Shared Services
Commissionaire Structures
Branch Structures Call Centres Outsourcing
Centralised Distribution
Post deal integration
Cash Pooling
Typically this has been technology led consolidation delivering a variety of activity based point solutions
Section 1:
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Slide 5PricewaterhouseCoopers LLPSeptember 2006
Complexity manifests itself in 3 main ways producing higher Costs:
– Operations – life cycle costs, benchmarks, duplication, reinvention
– Management Governance & Legal – slow and complex decisions, layers, resistance to change, failed initiatives, poor alignment
– Structures – Legal entities, reporting, inter-unit activity, complex tax models
Section 1:
Complexity that does not add value to customers or creates drag on the organisation should be removed
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Slide 6PricewaterhouseCoopers LLPSeptember 2006
Integrating the approach enhances the value
OperationalTechnology changeCustomer consolidationIncreased competitionRemoval of non value activities
Tax & Regulatory Directors DutiesSarbox & IFRSIncreasing Tax constraints on debt push down
DealMerger integrationDivestment structuringIPO
OperationalPerformance managementProcess costsCustomer managementFacilitating the Tax advantage
Tax & RegulatoryClarity on riskVisibility & controlLean corporate centreRelease dividend trapsTreasury arrangements
DealCorporate ValueReporting regulations
Value is created by integrating these normally discrete activities
DRIVERS Value
Tax
Operations
Legal
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PricewaterhouseCoopers LLP
Agenda/Contents
Section 1- Complexity: What’s the issue?
Section 2 – Operational Cost & complexityOperational Cost & complexity
Section 3 - Structural Cost and Complexity
Section 4 - Conclusions
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Slide 8PricewaterhouseCoopers LLPSeptember 2006
Transactional
Management
Business Analysis
Decision Support
Investment Appraisal
Cost Management
Tax Planning
ManagementReporting
Budgeting & Forecasting
TreasuryManagement
ConsolidationAnd reporting
Planning
Routine Reporting
Fixed Assets
Travel & Expenses
Accounts Receivable
ReconciliationsIntercompany
Cash and Banking
Accounts Payable
Process ownership
Control environment
Payroll
Global Standards / Automation / Offshoring
Distributed/Aligned to the
business
Decision Support
Centre of Excellence / Online / Predictive
Modelling
Operational Complexity – typical initiatives
C- level: Are likely to remain focused on governance and performanceThe latest focus of change:
Decision quality, visibility and performance management are the focus
Tier 2 management structures are significant to Tax and legal benefits
Activity based integration: Historically a key area of focus, with integration now common place.
Complexity is inherent in organisational development, managing this out is central to corporate performance
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Slide 9PricewaterhouseCoopers LLPSeptember 2006
For all functions, there is a continuous integrated journey
Organisations are already aware of the integration challenge but the focus is moving to. Simplification of:
Delivering greater visibility through improvements in information flow
Establishing a systems base to manage performance and facilitate the control model
Establishing a decision making and operating model which facilitates the structure
Mininising headcount through economies and best in class processes
RemoveComplexity
Standardiseprocesses
commonSystem
Establish neworganisation
Removecomplexity
Standardiseprocesses
commonSystem
Centraliseprocessing
Establish neworganisation
Removecomplexity Standardiseprocesses Centralise processing Implement e.enabledcommonSystem
Migrate to virtualprocessing
Removecomplexity
Standardiseprocesses
Removecomplexity
contracted
Systems –
Multiple
Process -Non-Standard
Complex
Diversity &Inconsistentperformance
People
People
Process –Standard/Simple
Systems - Common
Consistent &managed
performanceManaged
performance
Standard/SimpleProcesses
Systems - Common
PeoplePeople
Standard/SimpleProcesses
e.enabled system
People
Diversity &known
performance
ProcessStandard/Simple
Systems –
Multiple
People
Diversity &Inconsistentperformance
ProcessNon-Standard
Simple
Systems –
Multiple
Cost by function Effort needed
RemoveComplexity
Standardiseprocesses
commonSystem
Establish neworganisation
Removecomplexity
Standardiseprocesses
commonSystem
Centraliseprocessing
Establish neworganisation
Removecomplexity Standardiseprocesses Centralise processing Implement e.enabledcommonSystem
Migrate to virtualprocessing
Removecomplexity
Standardiseprocesses
Removecomplexity
contracted
Systems –
Multiple
Process -Non-Standard
Complex
Diversity &Inconsistentperformance
People
People
Process –Standard/Simple
Systems - Common
Consistent &managed
performanceManaged
performance
Standard/SimpleProcesses
Systems - Common
PeoplePeople
Standard/SimpleProcesses
e.enabled system
People
Diversity &known
performance
ProcessStandard/Simple
Systems –
Multiple
People
Diversity &Inconsistentperformance
ProcessNon-Standard
Simple
Systems –
Multiple
Cost by function Effort needed
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Slide 10PricewaterhouseCoopers LLPSeptember 2006
Cost in Management is more subtle, and critical….
Complex decisionComplex decisionmakingmaking
Failing projectsFailing projects
Different view Different view of authorityof authority
Legal Legal responsibilityresponsibility
Rewards and Rewards and reportingreporting
Direction and Direction and impactimpact
Resistance to Resistance to changechange
Slow adoptionSlow adoption
What stops change?- Mental Models
- Authority and Role- Objectives and Reward
Challenges
Change agents
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Slide 11PricewaterhouseCoopers LLPSeptember 2006
Simplification helps reduce these challenges and facilitate benefits from new areas
√
Central TeamFinanceManagement reportingITGovernance & AdministrationSupply ChainManufacturingProcurementProducts & customer
Degree of local resourcesDegree of central resources
Activity Local Collaborative Co-ordinated CentralIn Finance, complexity is being driven out…and costs are moving from 3-4% of revenue to 1% or under
In Procurement & Logistics, significant buying costs and inventory are now being driven out
IT spend is increasingly being targeted in non core activities
The move away from integration through technology creates a broader range of opportunities
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Slide 12PricewaterhouseCoopers LLPSeptember 2006
Example: Post merger simplification
76%
58%
56%
47%
43%
34%
0% 20% 40% 60% 80% 100%
Time & resources required to implement plans whilst continuing
Business as Usual
Ambitious targets set in acquisition plans are hard to achieve
Understanding of impact of cultural issues on integration
Specific skills are required to deliver the plans
Acquisition plans are not specific or detailed enough to implement
Lack of top management sponsorship and support
% ranked as priority no. 1, 2 or 3 out of 6
Managing the balance of integration whilst delivering core business is seen as the toughest challenge
Typical integration challenges
Aligning senior management of the two organisations on integration strategy, objectives, principles and priorities
Assessing the progress with integration planning and delivery against expectations
Dealing with conflicting priorities for management focus and best resources between integration and business as usual
Developing and executing an optimised business model to drive cost synergies, operational synergies and decision making
Quickly leveraging the increased procurement volumes and “best of both” terms.
Identifying and managing tasks that need to be completed across the business to be ready for Day 1 (completion date)
Reviewing and optimising the property portfolios of the merged business
Dealing with regulatory restrictions on sharing of market/price sensitive data until completion
Addressing the cultural issues that will exist between the two organisations
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Slide 13PricewaterhouseCoopers LLPSeptember 2006
Example: Post merger simplification
Page 6PricewaterhouseCoopers
Boots/ UnichemDecisions that will influence integration and its pace
StoresOne fascia/brand, entrepreneurial vs managed culture, pharmacist vs retailer, promotional policy,
consistency of fit -out, local vs. central control, maintenance philosophy, food vs drugs?
Wholesale operation
• Trade ‘experience ’• Volumes and
regions• Legislation• Capex and
maintenance• Target cost to sell• EPOS system and
scalability• Disposals?
Merchandising
• Range and brand choices eg No.7 and Basics
• Promotions management
• Local flexibility vs. central control
• Management of larger range
• IT Systems and tools
Supply Chain/ replenishment
• Central vs. local role
• WMS choice?• Stock management
and reordering• New product
introduction• Outsource options?• Shrinkage
Store operations
• Customer ‘experience ’
• Stores to close or dispose
• Capex and maintenance
• EPOS systems• Store style - ‘Look
and feel ’• Regional strategy
Central and Administration – Nottingham vs London? One head office, integration of finance (where), IT systems and management reporting templates,
HR, marketing, property and estates,
Buying
• Department integration
• Buying team selection
• Supplier negotiations
• Benefiting from group volumes
• Pricing strategy
Manufacturing
• Future role within AB
• Disposal?• Drive available
improvements• Expand products
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PricewaterhouseCoopers LLP
Agenda/Contents
Section 1- Complexity: What’s the issues?
Section 2 - Operation Costs and Complexity
Section 3 – Structural cost & complexityStructural cost & complexity
Section 4 - Conclusions
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Slide 15PricewaterhouseCoopers LLPSeptember 2006
The Conventional Tax & Legal Structure
EuropeanHolding
Company
France Germany Italy Spain UK
ABC Group
…. But this leads to
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Slide 16PricewaterhouseCoopers LLPSeptember 2006
ABC GroupIP
Sweden
Italy
Ireland
Hungary
CustomerFrance
CustomerItaly
CustomerIreland
CustomerHungary
Transaction flows (= purchase of raw materials, sale of finished goods)Royalty payments
Third Party Vendor
Third Party Vendor
FULL-RISK MFRSSUPPLIERSFULL-RISK SALES COs
CUSTOMERS
Spain
UK
Conventional business model – illustrative transaction flows
Germany FranceThird Party Vendor
Third Party Vendor
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Slide 17PricewaterhouseCoopers LLPSeptember 2006
Key:
Corporation Branch
Germany
SingleEuropean Entity
UKUKItalyFrance
Alternative 1: “Strawman” legal branch structure utilising Single European Entity framework
ABC group IP
Big impact of Alternative 1:
•Elimination of inter-company processing
•Eliminate components of corporate and statutory governance
•Statutory filings & associated costs are reduced
•Systems simplified and reconciliations reduced
•Control environment simplified
•No VAT on Services between SEE branches
•Limited requirement for audit or public disclosure of branches.
…Not a tax play: no functional change …
•SEE can accommodate both the manufacturing and sales function.
•SEE can be Societas Europaea or existing national company
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Slide 18PricewaterhouseCoopers LLPSeptember 2006
• Protection of existing parent and local country tax attributes (e.g. tax losses)
• Minimisation of parent and local country tax cost on transition (e.g. transfer taxes, capital gains) and on an ongoing basis (e.g. attribution of profits, CFC/Subpart F)
• Review of special purpose vehicles and impact on future tax planning
• VAT and Customs considerations
Human Resources
• Worker participation and unions• Employee remuneration, personal
tax and pension arrangements• Transfer of employee contracts• Local management impact
• Redesign of back office processes
• System reconfiguration• Treasury and cash
management• New or different administrative
structure requirements
• Method of effecting new structure (e.g. legal mergers, transfer of assets)
• Management of third party consents (e.g. bankers, vendors, distributors)
• Regulatory constraints• Commercial risk profile• Transfer of contracts and real
estate
LegalTax
Accounting/Finance/IT
Operations
• Degree of change required
• Customer perception• Stakeholder
management• Complexity/timing
of transition
Alternative 1 – The Key Issues to be Managed
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Slide 19PricewaterhouseCoopers LLPSeptember 2006
The Conventional Tax & Legal Structure
Pros and cons of the SE
Pro’s
PLC
European entity
Migration
Cross border mergers
Con’s
Timing
Worker participation
US tax
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Slide 20PricewaterhouseCoopers LLPSeptember 2006
Customersproduct
Productionand supply plans
managementinformation
invoicesdemand plans
raw materialrequirements
product
Material flow
Information flowLegal flow
Other servicesSSC / R&D
Rawmaterials
orders and/orrelationships
Entrepreneur
Suppliers
Factories
Regional/Centralwarehousing
Toll/ContractManufacturing
Limited risk distributor,
commissionaire, agent
Alternative 2 – Simplified Functional Organisation
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Slide 21PricewaterhouseCoopers LLPSeptember 2006
Third Party Vendor
Third Party Vendor
Third Party Vendor
Third Party Vendor
ABC GroupIP
TOLLERSSUPPLIERS
IP OWNER
France
Italy
Ireland
Hungary
LIMITED-RISK SALES COs*
Service fee (i.e. tolling)Transaction flows (= purchase of raw materials, sale of finished goods by Entrepreneur)Royalty payments
*These could be limited-risk distributors, commissionaires or commission agents.
Germany
Spain
CustomerFrance
CustomerItaly
CustomerIreland
CustomerHungary
CUSTOMERS
Big impact of Alternative 2:
• Central decision-making for manufacturing and distribution activities.
• Conversion of manufacturing plants from entrepreneurs to service providers (tollers).
• Significant reduction in intra-group transactions.
• Simplified P&Ls of manufacturing and limited-risk sales companies (and governance reduction).
Multi-territory customers
Direct sales
Alternative 2: “strawman” simplified functional organisation –transaction flows
EntrepreneurSwitzerland
Key:
Corporation
Sweden
UK
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Slide 22PricewaterhouseCoopers LLPSeptember 2006
Why tax advantage Alternative 2?
helping justify and improving project returns by adding tax savings to the operational savings;
ensuring that operational change does not create tax exposure, risk or incremental cost;
providing additional funds for reinvestment in the business;
reducing administration and associated costs
Increasing theafter-tax returnfrom the new
business model
Business change initiatives are bringing operational benefits ...
… tax can add value to the operational benefits, achieved through operational centralisation, by:
Benefits
Tax benefits
Operational and supply chain benefits Time
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Slide 23PricewaterhouseCoopers LLPSeptember 2006
Two approaches to European Simplification
Centralisation
SimplifyFunctional
Organisation
EntrepreneurModel
ReduceLegal
EntitiesSingle Entity
Legal Structure
Benefits• Supply chain rationalisation and
savings• Improved business control• Possible reduction of intragroup
transactions and of tax crystallisation
• Potential for tax advantaging
Benefits• Improved business control• Reduction/elimination of
intragroup transactions• Reduced corporate governance
requirements• Reduced direct and indirect tax
filing where no fiscal entity i.e. in most EU countries
Alternative 1
Alternative 2
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Slide 24PricewaterhouseCoopers LLPSeptember 2006
EntrepreneurCo
Support Co
France Germany UKSpainItaly
• Entrepreneur• Primary risk taker• Key decision makers• High profit
• Single Entity Legal Structurewith localbranches
• Manufacturing, distribution, etc.• Low profit
Key:
Corporation Branch
Alternative 3 - Integration of Alternative 1 and Alternative 2 combining commercial benefits and administrative and structural savings
…the commercial, administrative and structural savings can be tax advantaged if this is possible or beneficial to the client..
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Slide 25PricewaterhouseCoopers LLPSeptember 2006
IP OWNER
Main Impact:
• Incorporates benefits of Alternative 1 and Alternative 2
•Reduction in administrative and infrastructure costs (e.g. auditcosts, filing costs, company secretarial, IT costs).
•Further reduction in intercompany transactions.
Third Party Vendor
Third Party Vendor
Third Party Vendor
Third Party Vendor
EntrepreneurSwitzerland
ABC GroupIP
SUPPLIERS
Service fee (i.e. tolling)Transaction flows (= purchase of raw materials, sale of finished goods by Entrepreneur)Royalty payments
Toller(eg. Germany)
Ger Sp UK Swe
Limited-risk Sales Co(eg. UK)
Fr It Ire Hung
CustomerFrance
CustomerItaly
CustomerIreland
CustomerHungary
CUSTOMERS
Multi-territory customers
Direct sales
Alternative 3: “strawman” centralised functional and legal branch structure
26
PricewaterhouseCoopers LLP
Agenda/Contents
Section 1- Complexity: What’s the issues?
Section 2 - Operation Costs and Complexity
Section 3 – Structural Costs and Complexity
Section 4 - ConclusionConclusion
27
Slide 27PricewaterhouseCoopers LLPSeptember 2006
Tax Delivery and Realisation Time-Line
Evaluation / Due diligence• Identify and evaluate proposition
Feasibility• Validate value proposition
DevelopPlan
Implementation• Roll-out /Go-live
Post implementation• Review
Pre-Acquisition
0 Months 2 - 3 Months 3 - 6 Months 6 - 9 Months 9 Months +
• Understand inheritedoperating modeltax footprint /risksvalue chain
• Model tax savings & operations
• Identify deal structure
• Strawman model• Model benefits / costs
• Road block identification
• Tax due diligence• Legal / systems due diligence
• Finalise model• Finalise roles / location
• Finalise processes
• Determine roll-out strategy
• Go-live• Feedback• Manage change
• Validate “substance”
• Eliminate risks pre-disposal
Post Acquisition
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Slide 28PricewaterhouseCoopers LLPSeptember 2006
Summary of approach
Value
Time
Experience
Improved decision making, visibility of performance & transactional activities to
reduce costsExit price improvement
Reduction in governance costs and risks by
devolving the complexity
4 – 18 months implementation depending
on the level of change
The Design and evaluation of the conversion of the European division to a centralised sales model
Implementation of a brand management company
and a low-risk sales model
Alignment of business operations with legal/fiscal
framework and the reduction in intercompany transactions
…. why wouldn’t you do this?
Rapid delivery through a established methodology and an experience team
Starting pre deal improves the speed and
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PricewaterhouseCoopers LLP
This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
© 2006 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PwC
…………. Delivering value through simplification