PwC Transactions Blog

Ready to reset your compass?

The geography of deal-making is changing fast. Over the last five years we have seen more deal value flow from the largest high growth markets (HGM) to mature market economies than in the other direction. Between 2008 and 2012 HGM companies invested US$161 billion into mature market companies, outstripping the opposite flow of US$151 billion. In 2012 alone, HGM companies closed deals for mature market targets worth US$32.6 billion, almost three times the amount they invested in 2005. We see this shift in dealflow direction as the start of something bigger, that will not just bring a much needed boost to the global M&A market but that can stimulate growth for both mature and HGM market companies alike. In this report, we look at how dealflows are changing and we also consider how new types of HGM investors are turning to M&A and the factors driving their investment choices. Large and mid-sized private companies have now joined the state-backed investors who were among the first to acquire mature market targets. HGM investors’ scope is also widening, with HGM to mature market M&A activity ranging from energy, raw materials and engineering to media, retail and consumer goods companies.

Getting to grips with new deal dynamics

Here are just some of PwC’s suggested measures for buyers and sellers in deals between high growth and mature market companies:

Addressing valuation mismatches

• Greater transparency by both buyers and sellers around deal drivers can increase trust/manage expectations.
• Sellers should not assume that an HGM company may have easier access to capital.
• Sellers need to understand the buyer’s investment timeframe and shareholder environment before setting premium.
• Clarify valuation techniques to ensure both parties are working with the same parameters.

Agreeing a timeframe for completion

• Both parties need to understand what constitutes a ‘normal’ timespan for negotiations and completion.
• Buyers should educate sellers early if special approval processes need to be followed.
• Foster relationships with key decision-makers at an early stage, so that dialogue is possible if the deal timetable begins to slip.

Connecting with decision-makers

• Take time early on to understand decision-making hierarchies – and who has the final say. This is particularly true for deals involving state-owned enterprises.
• Buyers bidding for targets with private equity (PE) involvement should have direct contact with the PE side as well as the target company’s management.
• Bear in mind that the time needed to develop relationships varies greatly from culture to culture.

Reconciling deal process differences

• Plotting the deal process and due diligence approaches of buyer and seller will highlight where they diverge.
• Communicating the reasoning behind due diligence practices can make the other party more comfortable/willing to cooperate with the process.
• Be aware that high growth markets can have very different reporting, tax and legal demands and systems that can slow the due diligence process and necessitate more requests for information.

Please click here to download the full report in PDF format.

For further questions please contact:

Jan Muyldermans

Lead Transactions Partner

Tel. +32 2 710 74 23

Whether you’re making an acquisition or looking for opportunities to simplify your group structure within the EU, this guide is intended to help you navigate the complexities of cross-border reorganisations. The book provides information on the technical fiscal aspects of the directive and an overview of its implementation within each member state. You will also find detailed country chapters, which facilitate comparison of the different rules in operation within each jurisdiction.

Find out more about our new book  on how to simplify your group structure in the EU: ‘ Tax Restructuring in the EU‘.

The number of chemicals companies engaging in cross-border mergers and acquisitions is substantially higher than it is in other sectors, as the figure above shows. Thirty-three percent of chemicals CEOs have completed at least one such deal within the past 12 months and 46 percent plan to do so within the next 12 months.

Looking to Asia to lead the way

The chemicals industry is particularly strong in Asia and North America; 67 percent of chemicals CEOs head companies with operations in Asia and 59 percent head companies with operations in North America (compared with 42 percent and 36 percent, respectively, of the total survey sample). However, most chemicals CEOs, like their peers in other sectors, expect Asian operations to grow more than North American operations over the next 12 months; 84 percent anticipate doing more business in the former, while only 52 percent anticipate doing more business in the latter.

Innovation key to growth

Chemicals CEOs continue to invest in new product innovation. Sixty-five percent plan to increase their expenditure on R&D over the next three years, which is more than in any other sector except entertainment & media (at 74 percent). Indeed, 30 percent of chemicals CEOs plan to make ‘significant’ increases in the amount they invest.

Backing tomorrow’s leaders

Eighty-three percent of chemicals CEOs also plan to spend more on leadership and talent development over the next three years, and 30 percent of these CEOs intend to spend ‘significantly’ more.

Cost-cutting and infrastructure improvements planned

Cost-cutting and infrastructure improvements are high on the agenda of chemicals CEOs, too. Eighty-seven percent aim to invest more in cost-cutting initiatives over the next three years. Similarly, 76 percent aim to invest more in upgrading their strategic technological infrastructure in order to facilitate modern manufacturing and logistics processes.

Download the publication “Setting a smarter course for growth: chemicals“

A new Tax Act Implementing the EU Tax Merger Directive into Belgian law was published in the Belgian Official Gazette on the 12th January and came into force immediately.

The act introduces a tax-free regime for cross-border reorganisations. In addition, it also brings the existing tax provisions applicable to internal reorganizations in line with the EU Merger Directive.  Most provisions are applicable as of the date of publication.

The EU Merger Directive of July 23, 1990 (as amended by the EU Directive of February 17, 2005) provides for a tax-neutral regime for cross-border reorganizations such as mergers, demergers, partial demergers, share-for-share transactions, contributions of assets and transfers of registered offices. Tax neutrality is provided both at the level of the companies involved in the reorganisation as well as in the hand of their shareholders.

Until now the EU Tax Merger Directive was not implemented in Belgian tax law, meaning that cross-border reorganisations were not covered by appropriate tax legislation. This situation is now resolved with the publication of the new Act.

The Act provides for a tax-neutral regime for cross-border reorganisations involving Belgian entities and/or Belgian permanent establishments. Moreover, various existing tax provisions applicable to internal reorganisations have also been aligned with the EU Tax Merger Directive. Other improvements have also been implemented to the existing general tax provisions relating to reorganisations.

Under specific conditions, Belgian tax resident entities and/or Belgian permanent establishments can now be involved in pan-European tax neutral reorganizations, where previously, for most cross-border reorganisations, tax-neutral regimes were not available.

The Act deals in particular with cross-border (inbound / outbound) mergers, demergers and cross-border (inbound / outbound) contribution of assets (lines of business / permanent establishment) and exchange of shares.

Because of the importance of this new legislation, the PwC Transactions team is organising a half-day conference in our office in the afternoon of 3 February 2009. PwC will give a thorough update on the changes that will be introduced by this new legislation and the opportunities it will bring for your business.

During this session, it will be explained how you will be able to carry out cross-border reorganisations tax-neutrally (whether in the form of a merger, demerger, contribution of a business, transfer of a seat of management, share-for-share deal, etc.). Among other innovations, it will allow you to utilise cross-border tax losses or simplify your group structure by reducing the number of entities in it, which will even become more and more important given the current market environment. It goes without saying that such reorganisations also have important social law aspects. PwC will also address these issues during the conference.

In addition, we take this opportunity to discuss the recent corporate law developments (regarding a.o. acquisitions of own shares, financial assistance and cross border mergers) and their impact on reorganisations.

Check the PwC M&A Academy website for more information.

Cross-border mergers are now regulated in Belgium further to the adoption by the Chamber of the Miscellaneous Provisions Act (the “Act”), which is aimed inter alia at implementing Directive 2005/56/EC on cross-border mergers of limited liability companies (the “Cross-border Directive”) into Belgian law. The Act entered into force on 26 June 2008.

Old Rules

Before the Act came into force, cross-border mergers were not organised under Belgian law. Legal writers were divided on the feasibility of cross-border mergers notwithstanding adoption of the Belgian Private International Law Code in 2004, which stipulates that mergers of legal entities are governed, for each of them, by the law of the State to which they belong before the merger. In a 13 December 2005 judgment known as the “Sevic judgment”, the European Court of Justice had also confirmed the principle of the freedom of movement and establishment of companies, allowing cross-border mergers[1], but the effects of such a merger remained uncertain under Belgian law.

Scope of the New Act

The Act introduces a new chapter V bis into the Belgian Companies Code, dealing with cross-border mergers and assimilated operations. The laws governing the tax consequences of cross borders mergers are currently in process.

Companies Entitled to Merge

The Belgian cross-border merger procedure applies to all legal entities that can merge at Belgian level, while the directive concerns only limited liability companies. The scope of the Act is therefore wider than that of the Cross-border Directive. A limited partnership (“société en commandite simple”), for example, can therefore validly merge with a foreign company if the latter’s national law allows so.

Public investment companies with variable capital and companies in liquidation are expressly excluded from the scope of the cross borders merger regulation.

Permitted Operations

In accordance with the terms of the Cross-border Directive, the Act only deals with three forms of merger: (i) merger by absorption, (ii) merger by incorporation of a new company and (iii) merger by absorption of a wholly owned subsidiary (this being defined as an assimilated operation). The Act does not regulate (i) (partial) demergers, (ii) contributions of a line of business or (iii) contributions by way of universal transfer.

Belgium has used the opportunity provided by the Cross-border Directive to allow remuneration in cash exceeding 10% of the par value. Cross-border companies can validly merge notwithstanding a cash consideration exceeding one tenth of the par value of the shares allotted by the company resulting from the cross-border merger or, in the absence of a par value, of the fractional value, provided the legislation applying to at least one of the foreign companies allows so.

I will address in a next posting the formalitites that need to be fulfilled …