Legal entity operational readiness

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A key factor in cross-border deal success

Cross-border deals are consistently large and complex. At closing (Day One), business assets, systems, people, process, and contracts need to be transferred between numerous legal entities and across multiple borders. Having a legal entity operational readiness plan in place can increase the deal’s chances of success and minimize operational risk. This applies to both newly merged companies, as well as those divesting businesses across borders. This type of plan is particularly important in international deals which tend to require the creation or separation of a large number of newly created legal entities, which all must be able function seamlessly on Day One.

Because of the time required to set up the correct legal entity structures, it is important to begin the operational readiness process early in the transaction life cycle. Quickly credentialing the new legal entities allows for minimal interruption of business operations. In most cases, a deal’s legal entity structure must be in place before the new business can begin to operate or make structural changes to unlock value.

Legal entities are subject to the specific requirements of the jurisdictions in which they operate, and local tax, legal, IT, commercial, accounting, and regulatory issues need to be understood and addressed. Ensuring compliance with a myriad of international regulations can be a dizzying experience. However, adherence to these regulatory frameworks is a necessity for business continuity. Therefore, as part of the legal entity structuring and operational readiness plan, the company should make sure that management understands all local requirements and has the proper local market resources in place to address them.

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Legal entity operational readiness: MethodologyAlthough most successful cross-border transactions require a customized approach to legal entity operational readiness, the following are several common steps companies should consider as part of their operational readiness planning and implementation.

Establish a governance structure It is critical to dedicate adequate organizational

resources to the operational readiness process. Creating a project management office (PMO) to manage the process is recommended as a centralized source of information and execution. A PMO (which may also oversee other deal functions such as enterprise-wide functional integration or separation) is particularly important in the operational readiness process because the organization may be dealing with numerous cross-border regulatory issues simultaneously. For example, labeling requirements for pharmaceuticals may vary by country and packaging information may also need to be adapted.

Align with Tax on the proposed legal

entity structure and define an operating model strategy

The timely determination and alignment of the legal entity structure to the target operating model is particularly important. Getting it right will enhance the post-deal organizational structure and simplify integration efforts.

Define a deal time line and key

objectives Deals are often transformational and have broad

implications for a company’s functions, people, and processes. Careful planning and clear communications with all key stakeholders,

coupled with a timely execution against the established time line and objectives, will help to unlock the full value of the transaction and minimize disruptions to the ongoing business. We often find that time lines depend on local jurisdiction requirements. Identifying a critical path that takes into account local level legal entity issues will be critical to completing long lead activities and meeting deal time lines.

Identify and manage critical paths

and interdependencies It is crucial to actively manage critical path activities

and interdependencies among key functional areas to guarantee that the newly created legal entities are fully operational when the deal closes. As mentioned, this is a complex undertaking in a cross-border deal that requires coordination between markets with differing tax, legal, and regulatory requirements.

Credentialize the newly created

legal entities The requirements to do business within a country

can vary from market to market. Obtaining marketing authorizations, VAT registrations, and anti-trust approvals are just some of the regulatory hurdles that may need to be cleared before an organization can do business in a new market with a new legal structure.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Case studiesSpinning off a segment to focus on core growth

IssueA global healthcare services company operating in the biopharmaceuticals and medical products segments announced plans to separate its biopharmaceutical business to create two independent companies via a tax-free spinoff. The challenge for the company was to quickly operationalize a new global legal entity structure, while still maintaining a tax-free status.

MethodologyThe company, assisted by KPMG, quickly mobilized the local resources to obtain a deep understanding of the rules and regulations specific to each jurisdiction to drive momentum and meet tight deadlines. One of the more challenging requirements involved product registrations, which were needed to meet legal requirements needed to transport the medical products across international borders. Local experts were leveraged to ensure that local laws were followed and that all requirements were met in a timely manner.

ResultDeveloping an operational readiness plan early in the process and sourcing local specialists was critical to a seamless and timely transition. The client operationalized legal entities across 100 jurisdictions leading to a successful transaction close with no disruptions to customers, vendors, or employees. The success of the spin-off helped market the independent biopharmaceutical segment, which was ultimately acquired by another biopharmaceutical firm with a global footprint and similar business focus.

KPMG teams in Chicago, Rio de Janeiro, Singapore, and Zurich coordinated regional activity and executed on local requirements, including:

– Movement of employees between dozens of legal entities

– Mapping of product flows across 60+ newly established legal entities and routes to market

– Product registrations in 60+ jurisdictions.

Affected jurisdictions Regional KPMG Hubs

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Consolidating legal entities to unlock savings

IssueA global manufacturer of confectionary products acquired another global confectionary company to enhance their position in the marketplace. Post-merger, the company struggled to manage the global effort to merge the legal entities and, as a result, was unable to realize the synergies anticipated in the merger.

MethodologyKPMG deployed resources with subject matter knowledge and operational experience to determine local requirements and their impact to the merged entity’s business operations. The team created a comprehensive plan pertaining to each jurisdiction and a road map to implement the consolidated legal entity structure, which had been lacking. Prior experience was leveraged to anticipate issues and focus effort on all critical activities.

ResultThe client implemented a process to combine legal entities across two separate global organizations. The legal entity consolidation plan led to cost savings through the elimination of duplicative employee roles, the consolidation of ERP systems, the enhancement of route-to-market design, and the reduction of the administrative burden. After adopting the plan, the merged entity began to realize the anticipated synergies.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Top eight considerations for legal operational readiness Companies executing legal entity reorganizations should begin by assessing the needs and impacts of the new structure

Legal entity structureObtain early alignment on the legal entity structure, form legal entities across affected jurisdictions, and identify cross-functional impacts. The legal entity structure is the main driver of the legal entity’s activities. The structure dictates where legal entities need to be formed and operationalized or closed. The timing of legal entity formations has a direct cross-functional operational impact on the business and drives the timing of all legal entity related activities. Global companies undergoing transactions use this opportunity to reassess their legal entity footprint and typically require external in-country and central support to implement the desired structure.

Tax planningIdentify the tax objectives of the new business, develop an optimal tax structure, and facilitate the transaction. The tax objectives of the business determines the structure of the transaction (fully taxable, partially taxable, tax- free, etc.). In turn, the structure of the transaction drives the creation of the legal entity structure. Careful planning and execution are required to preserve the desired transaction status.

IT systems setupDefine future state requirements, and implement systems to accommodate the new legal entity structure. The end-state system structure, including master data transfers and critical dates for the system setup need to be identified early in the process to ensure the business is properly supported at close. The ability of a seller to seamlessly serve its clients at spinoff largely rests on its ability to effectively develop its IT architecture in a timely manner.

Funding and working capitalDetermine working capital needs and fund accounts accordingly. Working capital is needed to run the daily operations of a business. In a spinoff, the short-term cash needs for the target should be isolated and corresponding accounts funded to match needs. In a transaction, buyers will often require that enough cash is left to meet the short-term payment obligations in order to avoid payment delays or having to borrow.

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Employee transition and alignmentDevelop a employee communication plan, convey the value of the transaction, and seek buy-in from employees. Employee alignment has a direct impact on the success of all transactions. Lack of transparency and information sharing can lead to low morale and attrition. In order to prevent feelings of anxiety and uncertainty, employees must be kept informed on changes relating to compensation, benefits, future roles, and severance. To retain key talent, competitive incentives should be introduced.

Asset transfer pricingAscertain practices and align entities on the transaction valuation approach. In instances where a segment is considered separately from its multisegment parent, transfer prices valuations are used to evaluate the segment on a stand-alone basis. To accurately reflect the health of the business, the valuation of the segment should be based on business valuations and not asset transfer pricing.

Vendor managementIdentify all vendors, reevaluate contracts, and develop a plan to split, assign, renegotiate, break, or end the renewal of contracts. Legal entity changes necessitate a review of contracts due to the change in the contracting entity. In instances where contracts are dedicated to the segment and there are no change of control provisions, the segment will continue to be supported by the contract. In instances where the contract is shared with the parent or other segments, or where change of control provisions exist, additional steps need to be taken to split the contract, fulfill the change of control provision, renegotiate, or terminate the contract.

Regulatory authorizationsDetermine regulatory requirements and obtain product market authorizations. In order to be able to move products across jurisdictions, all regulatory requirements in all relevant jurisdictions need to be met. For example, the inability to obtain a product registration reflecting the correct legal entity name can prevent a life-saving product from import or sale in a jurisdiction. This can lead to negative reputational and financial impacts.

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ConclusionAs global deals become increasingly complex and involve a number of international markets, companies should plan to include a legal entity operational readiness road map in their deal plans. The legal entity is the very important vessel that houses a business; it has the credentials to do business. The transaction is the trigger for the business to either board the vessel, as would be the case in an acquisition, or disembark, as in the case of a separation. Organizations should understand how to manage the operational readiness process under a number of different transactional situations and plan for the requirements early in the process and with a clear understanding of local business requirements. Using local resources is often advisable. Getting this process right can greatly enhance deal value.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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How KPMG can helpM&A Services KPMG advises clients on operational integration or separation of businesses across all corporate functions to deliver value in a timely manner. ISA takes an enterprise-wide view in the form of integration/separation due diligence, synergy and cost assessments, TSA development and management, Day 1 planning and execution, post-close implementation, change management, and performance tracking.

Tax AdvisoryKPMG Tax is experienced in legal entity OR planning and implementation.

KPMG Tax professionals (with various tax specialties) offer in-depth skills, experience, and an unbiased approach to thinking beyond the current state. With multijurisdictional knowledge and an established track record, KPMG Tax helps mitigate risks and address business, tax, regulatory, and commercial considerations while building a new, sustainable, and more tax-efficient legal entity structures.

Our authors

J. Preston Parker Principal Strategy - M&A Services

Andrew Lindsay Managing Director Strategy – M&A Services

Magdalena Lipka Manager Strategy – M&A Services

Jason Dalal Sr. Associate Strategy – M&A Services

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Key considerations

– Operational Readiness Consideration: Can the existing corporate structure support the proposed merger form (i.e., reverse vs. forward vs. triangular)?

– Operational Readiness Consideration: How quickly, and to what extent, should we integrate the acquired business into the existing business, considering the Transition Services Agreement in place?

The buyer is purchasing only the assets of the seller (along with people, contracts etc.) and not the legal entities that hold the assets. The buyer needs to determine where the assets will reside in its corporate structure and whether the assets are part of the buyer’s long-term strategy or whether they will be sold or spun off.

– Operational Readiness Consideration: Do we enable existing legal entities to hold the purchased assets, or should we create and stand up new legal entities for those assets?

– Operational Readiness Consideration: To what extent should the acquired assets be integrated into business operations?

The seller must consider the corporate structure of its organization post-transaction and potentially undertake a legal entity rationalization.

– Operational Readiness Consideration: Do we need to create or eliminate legal entities based on our post-transaction operating model?

– Operational Readiness Consideration: What happens to the remaining processes and people that supported the divested assets?

AppendixCommon deal types and key, related operational readiness issues

Transaction

Merger

Steps needed

Consult with legal and tax advisers and determine whether the corporate structure needs to be adjusted in order to execute the proposed merger.

Undertake a legal entity rationalization (further discussed below) to evaluate the business’ needs post-divestiture. Consider what duplicative organizations exist in light of the divestiture and consider how financial reporting and cost structure have changed.

Acquisition of Carved- Out Portfolio Assets (1/2)

Divestiture of Carved- Out Portfolio Assets (2/2)

Determine whether assets should be transferred into existing legal entities, resulting in potentially “mixed” operations, or to a newly created legal entity, operating the assets as an independent business.

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Key considerations

The spin-off must effect a complete separation, thus legal entities with commingled operations and assets can drive complexity.

– Operational Readiness Consideration: How do we identify and disentangle shared assets, processes, and people?

– Operational Readiness Consideration: How do we enable both businesses to succeed post-separation? What agreements need to be put in place during the interim period to continue certain shared services?

Post-close, an organization should examine its legal entity structure to determine if it is optimally structured to support its business model.

– Operational Readiness Consideration: Is our existing corporate structure suited to execute our operating model?

– Operational Readiness Consideration: Can we lower our tax exposure by establishing new centers for business?

Transaction

Tax-Free Spin-Off

Steps needed

A tax-free spin-off is as demanding as any divestiture or carve-out, with additional tax and SEC considerations. Close consultation with legal and tax advisors is necessary to avoid high transaction costs and ensure regulatory compliance. Detailed operational mapping will be needed to identify entanglements.

Legal Entity Rationalization

Undertake a review of your organization’s footprint to determine where operations require the presence of a legal entity, whether operations are profitable, whether operations should be outsourced to a JV or third-party arrangement and if the corporate structure is optimally aligned to the needs of the business.

© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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Contact usJ. Preston Parker Principal Strategy – M&A Services 703-585-9997 prestonparker@kpmg.com

Andrew Lindsay Managing Director Strategy – M&A Services 404-593-5917 ajlindsay@kpmg.com

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