• Mischa Sollberger, Partner |
  • Beat Gubelmann, Senior Manager |

In the light of current macro developments such as the interest rate and inflation environment, executing deals successfully is as challenging as ever. To maximize value creation in M&A, dealmakers should also consider an often unexploited lever – namely TP planning and integration. 

Inhibited and restrained dynamic in M&A activities

In the wake of a subdued fiscal year characterized by a decline in M&A transactions, the year 2023 maintained a restrained posture in the realm of active dealmaking. This state of affairs was particularly influenced by the transformative presence of generative AI, that significantly impacted businesses’ outlooks and expectations. Notably, the global landscape of M&A activities in 2023 witnessed a transaction volume totaling USD 2.02 trillion, encompassing the execution of 37,218 deals. A parallel trend was observed in the domain of large and megadeals, where the count of major M&A announcements dwindled to 18 by November 2023. This nuanced development mirrors the insights drawn from KPMG's global economic outlook, a document that discerns critical uncertainties steering this trajectory.

The crux of influence on the M&A landscape emanated from stringent monetary policies, strategically calibrated to mitigate the surge in inflation. This approach significantly impacted output and growth prospects throughout the fiscal year 2023. Furthermore, the augmentation of interest rates in the preceding year introduced an added layer of intricacy, elevating the cost of financing acquisitions and concurrently exerting downward pressure on equity prices. Consequently, this confluence of factors operated synergistically to dampen M&A activities across diverse sectors and geographical domains.

Value creation in M&A and where transfer pricing plays a role

For M&A transactions to actually create value, acquirers may look to exploit one or several of the following opportunities, amongst others. 

Cost savings

One of the most common ways companies create value through M&A is through cost savings. By acquiring another company, a business can reduce costs by eliminating redundancies in areas such as marketing, operations or administration. Eliminating redundancies almost always has a TP angle, be it due to transfers of functions or businesses and related compensation/exit tax considerations or by ways of an adjusted TP model (or both). 

TP aspects  

The cost impact of TP, both one-offs and ongoing TP model changes, therefore need to be considered thoroughly when assessing the total cost savings of envisaged measures. 

Market expansion

Another way companies create value through M&A is by gaining access to new markets and customers. By acquiring a company that operates in a different geographic region or serves a different customer base, a business can expand its reach and increase its revenue potential. This means that new companies (potentially in new jurisdictions) are integrated into the acquirer’s TP model, posing a number of TP questions ranging from a decent remuneration/target profitability for such companies in their respective regions in the light of their functional profile as well as operational TP and compliance challenges. 

TP aspects

In order to avoid any unpleasant surprises and TP compliance gaps, the fit of the acquirer and target’s TP model should be assessed early in the process and any adjustments and related costs considered before PMI starts. 

Acquisition of valuable (intangible) assets

In addition to cost savings and market expansion, companies can also create value through M&A by acquiring valuable assets and resources. These assets can include intellectual property, proprietary technology and valuable brands. For example, a company looking to enter a new market may acquire a company with a well-established brand in that market to gain immediate recognition and credibility. As the treatment of IP within MNEs is one of the most complex and most vulnerable TP topics, acquirers should pay particular attention to the acquisition of important intangible assets during the deal structuring phase and in drafting the SPA. 

TP aspects

Special attention should be paid to the jurisdiction into which such IP is acquired (location of relevant IP development, enhancement, management, protection and exploitation (DEMPE) functions, tax treaty network (relevant for withholding tax questions if licenses/royalties are to be charged), etc.), the consideration allocated to such IP in the purchase price allocation (PPA), etc. 

Increased complexity requires a holistic approach

The above list could be extended indefinitely, leading to significant complexity in assessing TP risks, one-off cost impact and the TP impact on the ongoing profitability of the combined group in the future. It is therefore imperative to not consider the TP aspects of various transaction parameters in isolation but to take on a holistic approach to analyzing the TP impact on M&A value creation, for example by performing a value chain analysis of the target and acquirer’s business, optimally during the due diligence phase and before integration starts. Deal teams supporting acquirers (and similarly targets for separation considerations) should therefore be interdisciplinary and include transaction and transfer pricing specialists that seamlessly work together to maximize value creation of the combined business. 

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