During the last decade we have seen a considerable increase in M&A deals, reaching its peak during 2015 with a global M&A value of just below $4.8tn. During 2020 we have seen a slight decrease in the value of global M&As, to just below $3tn, with more than 50% of those deals being made in the US. From an African perspective, the M&A deal value is still recovering from the 2016 shock but is expected to return to 2019 figures within the next few years.

As the world recovers from the pandemic, the number and value of such deals during 2021 and 2022 is expected to increase, this is due to the fact that being acquired, is the only option for a number of companies as they manage this crisis, whilst the larger corporations see this as an opportunity for growth.

Structuring the deal correctly is key to ensure a successful M&A. Several key factors need to be taken into consideration and this depends on the type of deal, whether it is an asset or a share deal, and whether one is looking at it from the buy-side or sell-side of the transaction.

Asset Deal

An asset deal involves the transfer of a particular asset or of the business, but not via an acquisition of shares. Several considerations need to be made when looking at such a deal. From the sell-side, the main point of focus is the tax implications on the sale of the asset, and what costs can be taken as a tax deduction on the selling price. Depending on where the deal is happening, indirect tax issues such as VAT could also come into play and could have an impact on the final price which is agreed between the parties.

From the buyer’s side, the focus is typically on the tax deductibility of the cost of the asset on future income streams which it will generate. Certain jurisdictions also allow a step up in the base cost of the asset for particular companies.

Another major factor for the buyer is how the acquisition will be financed. From a tax point of view, debt finance as opposed to equity finance is typically preferred, although a number of jurisdictions have introduced a notional interest deduction to level the playing field between the two.

Share Deal

Here again, the seller’s main point of concern is the tax implication on the gain made from the sale of the shares. Several jurisdictions provide interesting options in terms of structuring a share deal from a seller’s perspective, as they provide tax exemptions on gains made from such sales. From a European perspective, one would look at Malta, the Netherlands and Luxembourg as the main holding company jurisdictions for this purpose.

Other considerations also come to mind when looking at various holding company options – one of which is the withholding tax, or lack thereof, on outgoing dividends, as this could reduce the take home to any shareholders and investors.

The buy side would be more interested in any other taxes on such an acquisition – some countries impose a stamp duty on the buyer when acquiring assets such as stocks and shares.

A lot of energy goes into every M&A deal, despite this only around 60% of such deals are successful. Tax and structuring are an extremely important part of the equation, but at the same time, are simply one part of a more complex process.

 August 2021

Nicky Gouder is a co-founding Seed Consultancy, a research-driven advisory firm based out of Europe.

www.seedconsultancy.com | nicky@seedconsultancy.com