Part 1.3: Banch vs subsidiary, Funding, Non-tax issues Flashcards
What does an organization has to take in consideration when acquiring foreign assets or shares?
- formation of a foreign branch or subsidiary
- Choice of the entity: different forms of legal entities with better financial advantages eg. partnership, trust, joint venture, …
- integrating acquired business with existing subsidairy or new subsidiary? (offset losses with profits, tax benefits,…)
What are the resources for funding? (3)
- Internal = most international/multinational companies have an internal bank/cash pool where they can get funds
- External = a loan from banks, funds from the public
- Additional cash raised from the present shareholders or by use of a new public issue
What are alternatives of financing to fund the acquisition of Target’s shares or assets?
Acquisition of the assets or shares:
1. issue shares
2. pay cash
3. paying the price consideration by means of other assets (or right) - not common
=> depends on the choice of Vendor or Target
What can be the effect of issuing shares?
Issuing shares does not have immediate cash cost to Bid Co, it may dilute the net tangible asset backing per share and thus adversely impact the interest of existing shareholders.
There is a continuing obligation to service dividends to shareholders which is a non-deductible finance cost in most jurisdictions.
What does Bid Co need to consider when choosing for the optimum financing position? (3)
- Tax deductibility of interest expense
- Application of withholding taxes
- Foreign exchange exposures
How to fund any take-over succesfully?
The interest cost must be taken in a jurisdiction where it is tax deductible. Generally, the group should take the interest deduction in the highest tax jurisdiction. Thin capitalization provisions and the implementation of ATAD (Anti Tax Avoidance Directive/ Earning Stripping Rules) should be taken into account as well.
What are the non-tax issues that should be taken into account when acquiring shares and assets? (5)
- Financial issues
- Personnel issues
- Marketing issues
- Operational issues
- Other issues
What are the non-tax; financial issues in an acquisition? (15)
1. Financial issues • Gearing levels • Availability of local finance • Borrowing constraints • Cash flow • Any unrecorded or contingent liabilities • Age of debtors/stock • Valuation and recording of assets/liabilities • Level of insurance cover • Capital/work in progress/commitment • Currency exposures • Funding of acquisition • Corporate structure/cost of rationalisation • Exchange controls • Effect on parent's balance sheet • Quality of auditors
What are the non-tax; personnel issues in an acquisition? (5)
2. Personnel issues • Industrial relations climate and any industrial award agreements • Quality of local management • Retention of key employees • Golden parachute clauses • Relative wage rates
What are the non-tax; Marketing issues in an acquisition? (5)
- Marketing issues
• Adequacy of distribution outlets
• Availability of major sales/licensing agreements following change in shareholders
• Loss of key customers
• Product substitution
• Existence of export licenses, import quota or other trade regulations
What are the non-tax; operational issues in an acquisition? (8)
4. Operational issues • Scope for cost saving and operating efficiencies • Age and state of plant and equipment • Age and relevance of technology • Long-term contractual commitments • Product liability • Operating safety standards • Acquisition of hazardous materials/property • Ownership rights over key assets
What are the non-tax; other issues in an acquisition? (6)
- Other issues
• Compliance with government regulations
• Restrictions on foreign ownership
• Anti-monopoly and anti-trust regulations
• Possibility of operation being nationalized
• Impact of local laws or regulations
• Local equity participation
