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M&A Process & Deal Structuring
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Prof. Jijo Lukose P.J.; IIM Kozhikode
Hutch Vodafone deal of 2007
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“Wherever you go our network follows” Although Vodafone
bought out Hutchison later, the pug stayed in its future ad
campaigns.
Wherever you go, the taxman will follow
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Hutch Vodafone deal of 2007
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In 2007 Vodafone International Holdings decided to enter India in 2007
through a subsidiary based in the Netherlands, which acquired Hutchison
Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd
(HEL). This Cayman Islands transaction, along with several related
agreements, gave Vodafone control over 67% of HEL and extinguished Hong
Kong-based Hutchison’s rights of control in India.
Standard methods are employed by global companies to shift their profits to lower-tax
locations , referred to as base erosion and profit shifting (BEPS).
Tax authorities argued that though the transaction was between two foreign
entities, since the underlying assets are in India, there was a tax liability.
Further, Vodafone should have recovered the tax on Hutchison’s before concluding
the deal.
Vodafone had challenged the same, saying it did not make any gains on the deal. The
British telecom major also argued that since the transaction was not between Indian
entities, there was no tax liable to be paid in India.
Hutch Vodafone deal of 2007
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The Supreme Court ruled in 2012 that Vodafone’s actions were “within the
four corners of law” and the Indian IT department had “no jurisdiction” to
levy tax on overseas transaction between companies incorporated outside
India. It also advised Indian taxmen to “look at” the transaction instead of
“looking through” it to attribute motives to the deal.
New IT provisions introduced in 2012 , applicable retrospectively from 1
April 1962. As per amended law, gains of non-resident from transfer of
share / interest in an overseas company / entity taxable in India if such
share / interest derives its value substantially from assets located
in India.
Government changed IT Act retrospectively and made sure that any
company, in similar circumstances, is not able to avoid tax by operating out
of tax-havens like Cayman Islands or Lichtenstein. In May 2012, Indian
authorities confirmed that they were going to charge Vodafone about
20000 crore (US $3.5 billion) in tax and fines.
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Hutch Vodafone deal of 2007
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Vodafone then filed a complaint with the international arbitration panel. The
panel is yet to give its ruling; Indian tax authorities have then issued the
notices to Hutchison.
In 2018, the tax department has asked Hong Kong-based Hutchison
Holdings to pay up over ₹32,000 crore as capital gains tax, penalty and
interest on the deal to sell its mobile business to Vodafone in 2007.
“This weakens the tax department’s case against Vodafone in the tribunal as
you cannot ask two entities to pay the same tax. In effect, the tax
department has conceded its case against Vodafone. Hutchison will contest
this claim, and the legal arguments have to be heard all over again,”
September 25 2020: NEW DELHI (Reuters) An international arbitration tribunal
in The Hague ruled that India’s imposition of a tax liability on Vodafone, as
well as interest and penalties, were in a breach of an investment treaty
agreement between India and the Netherlands, two sources with direct
knowledge of the matter said. India had claimed a total of 279 billion
rupees ($3.79 billion) including about $2 billion in tax, as well as interest
and penalties, one of the sources said.
Topics
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M&A Process
Tax Considerations
Role I Banks
Accounting
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Merger Process
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1. Merger Strategy & Acquisition Plan
Fragmented Industry Structure
Favorable growth potential
Reasonable valuations& Basic operations
Limited regulation
2. Search and Screening
Preliminary Evaluation & Company and industry research
Meetings with the management & Company visit
Letter of intent and in-depth due diligence research
3. First Contact, Negotiation, & Deal Setting
4. Closing the Deal, Post Merger Integration and Evaluation
Negotiation
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Profiling
Target
Market &
Firm
First
Contact
If No,
Walk
Away1
If Yes,
Initiate
Negotiations
Refine
Initial
Valuation
Structuring the Deal
Form of Acquisition
Form of Payment
Tax Considerations
Accounting Considerations
Acquisition Vehicle
Post-Closing Organization
Legal Form of Selling Entity
Develop
Financing
Plan/
Structure
Decision:
Proceed to
Closing or
Walk Away
Negotiation Process
Perform Due Diligence
Viewing Negotiation as a Process
Concurrent activities:
•Refining valuation
•Deal structuring
•Conducting due diligence
•Developing the financing plan
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Due Diligence During Negotiation
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Objectives:
Validate preliminary valuation assumptions (e.g., growth, cost, productivity, etc.).
Critical to the model building/updating process
Identify additional sources/destroyers of value (i.e., those providing upside potential &
“fatal flaws”)
Activities:
Detailed legal (e.g., contracts) and financial record reviews
Management interviews (consistency in questions asked)
Site visits (e.g., inspect equipment, inventory, etc.)
Customer and supplier interviews
Scope of due diligence (DD)
Commercial & Operational
Financial & Tax
Organizational and Cultural
Human resources
Information system
Legal
Advisers in Takeovers
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Investment Bankers : They offer services in corporate
finance, Equity market and Debt market. M&A advisory is
a major activity in corporate finance.
Investment Banks and Conflict of Interest
IB as adviser on M&A deal for the bidder and target
Conflict of interest may arise when the bank is a financial
conglomerate with fee-based, fund based and stock broking arms.
Legal Experts : Lawyers, CAs, Tax Consultants, Patent
Attorneys
Management Consultants : HR and Organizational design
issues
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Integration
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Post-closing integration is a critical phase of the M&A process
Except in highly complex situations, combining companies should be done
quickly to
Minimize key employee, customer, and supplier turnover
Eliminate redundant assets, and
Achieve returns expected by shareholders
Successfully integrated M&As are those whose management candidly and
continuously communicate a clear vision, set of values, and unambiguous
priorities to all stakeholders
Deal Structuring Process
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Major Components of
Deal Structuring Process
1. Acquisition vehicle (legal
entity to acquire of merge
with the target)
2. Post-closing organization
(Entity managing the acquired
business after closing)
3. Form of payment
4. Form of acquisition (Means of
Transferring Ownership)
5. Legal form of selling entity
Key Determinants
1. Control by owners
2. Management autonomy
3. Continuity of ownership
4. Duration or life of entity
5. Ease of transferring
ownership
6. Limitation on ownership
liability
7. Ease of raising capital
8. Tax Status
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Structuring the deal in India
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1. Merger: This entails a court approved process whereby one
or more companies merge with another company or two or
more companies merge together to form one company;
2. Demerger: This entails a court approved process whereby
the business / undertaking of one company is demerged into
a resulting company;
3. Share Purchase: This envisages the purchase of the shares
of the target company by an acquirer;
4. Slump Sale: A slump sale is a sale of a business /
undertaking by a seller as a going concern to an acquirer,
without specific values being assigned to individual assets;
5. Asset Sale: An asset sale is another method of transfer of
business, whereby individual assets / liabilities are cherry
picked by an acquirer.
1. Tax Neutral Merger
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