organic and inorganic growth in the us …

SPEAKERS

Saurabh DwivediDeputy General Manager Corporate DevelopmentPersistent Systems Ltd

Atul DeshmukhPartner - International Assurance

& Accounting AdvisoryKNAV

Shishir LaguPartner - US Tax

& AdvisoryKNAV

Vaibhav ManekPartner KNAV

Moderated byShivendra SinghVice President & Head Global Trade DevelopmentNASSCOM

Inaugural address by

Rajesh KhairajaniPartner - Global

Valuation ServicesKNAV

Biplab ChakrabortyM&A Head

Tech Mahindra

ORGANIC AND INORGANIC GROWTH IN THE US – UNDERSTANDING THE ACCOUNTING, TAX AND VALUATION NUANCES

WEBINAR

2

Growth will come to businesseswho are willing

to disrupt themselves

Today, one may argue thatsurvival is also akin to growth!

TOP 10 TRADING PARTNERS OF US (YTM MARCH 2020)

3

Rank Country Exports Imports Total TradePercent of Total

Trade

1 Mexico 60.3 87.5 147.8 15.3%

2 Canada 69.3 74.9 144.2 14.9%

3 China 22.0 75.9 97.9 10.1%

4 Japan 18.1 33.3 51.4 5.3%

5 Germany 15.8 31.0 46.9 4.9%

6 Korea, South 14.5 18.6 33.1 3.4%

7 United Kingdom 17.8 14.1 31.9 3.3%

8 India 8.7 14.0 22.7 2.4%

9 Taiwan 8.3 13.4 21.7 2.2%

10 France 9.9 11.5 21.4 2.2

Source: US Census Bureau

Amount in Billion $

CHOOSING A STRUCTURE TO DO BUSINESS IN US

4

Business Structures

Wholly Owned

Subsidiary

C-Corp LLC

Joint Venture /

Partnership

C-Corp LLC

Branch Office

VARIOUS CORPORATE STRUCTURES

55

Various options available for inbound investments into US:

• Branch of foreign corporation.

• C-Corporation.

• Limited Liability Company- Taxed either as flow-through entity or C-Corporation.

Other corporate structures less often used or unavailable

for foreign investors:

• S-Corporation.

• Partnerships.

Various tax and non-tax considerations for foreign corporations while deciding on corporate structure in US. Thisincludes exit considerations as well.

INCORPORATION- WHY IS DELAWARE PREFERRED?

66

▪ Identifying the state of incorporation could be a tricky business, since each state differs in terms of fees, taxability and other compliances.

▪ The state of Delaware is the most preferred state of incorporation for businesses. The few reasons why Delaware is selected as preferred destination for incorporation are:

• Delaware has a highly respected court that focuses on corporate issues – the Court of Chancery.

• The high volume of corporate cases in Delaware means there are likely several similar cases where advisors can look for

precedents, rulings on past cases, and create deals that lead to more predictable outcomes and less uncertainty in a legal dispute.

• The Delaware corporate statutes provide a great deal of flexibility in the organization of a corporation and the rights and duties of

board members and shareholders.

• The Delaware Secretary of State’s Office has made it a priority to provide expedited filings.

• Annual compliance cost in Delaware is comparatively lower as compared to other states.

• There are greater privacy protections in Delaware than some other states. Delaware does not require officer or director names to

be disclosed on formation documents.

• There is no corporate income tax from Delaware if an entity does business in another state.

ROADMAP TO THE US

7

Obtain permission

to remit forex

AD / RBI

Approval

- Select a State

- File Documents

Incorporation

Formalities

Regulatory

Compliances

Running

a Corporation

Incorporating a

Company in the US / Opening a Branch Office

OVERVIEW OF US TAXATION

99

▪ Different Taxes in the US:

• Income Tax

• Payroll Taxes

• Property Taxes

• Sales and Use Tax

• Customs Duty

▪ Three Tier System of Income Tax:

• The federal level- Currently 21%

• The State level e.g. NY,NJ,CA. – Generally in the range of 4% to 10%. Non income-based taxes in certain states, suchas Gross Receipts Tax, Capital or Net Worth based Tax, etc.

• Certain localities e.g. NYC, Philadelphia.

▪ Concept of consolidated and combined returns.

IMPORTANT CONSIDERATIONS FROM BIDEN TAX POLICY

1010

▪ Increases the corporate income tax rate from 21 percent to 28 percent.

▪ Double the tax rate on Global Intangible Low Tax Income (GILTI) earned by foreign subsidiaries of US firms from 10.5percent to 21 percent.

▪ Imposing a new 10 percent surtax on corporations that “offshore manufacturing and service jobs to foreign nations inorder to sell goods or provide services back to the American market.” This surtax would raise the effective corporate taxrate on this activity up to 30.8 percent.

▪ Establishing 10 percent “Made in America” tax credit for activities that restore production, revitalize existing closed orclosing facilities, retool facilities to advance manufacturing employment, or expand manufacturing payroll.

CHOICE OF INVESTMENT VEHICLE AND FUNDING

1111

Investment Vehicle –

• Local holding company.

• Foreign parent company.

• Non-resident intermediate holding company.

• Direct investment in US SMLLC/ partnership

Investment funding-

• Debt:

- Historical background / pronouncements on debt v/s equity classification incl 385 regs.

• Important aspects to be considered for interest deduction:

- IRC section 267- Deductibility of interest on cash basis.

- IRC section 163(j)- Thin Capitalization rules.

• Guarantee fees to India- Subject to 30% WHT.

• Equity: Dividend treatment

Mergers and Acquisition Considerations


STATISTICS

1313

▪ The Q3 M&A results saw the North American economy rebound with Q-o-Q gains of 23.5% and 7% in deal volume and value respectively. This also denotes the first gains in deal value since Q4 2019 and post the influx of coronavirus pandemic

▪ The Q3 deal value for the US stands at $ 280.85 bn with 1681 deals. The deal count for the three quarters sums to 6094 with the annual total expected to be around 7545 deals.

▪ Sector-wise, Information Technology topped the charts with 386 deals followed by Healthcare with 240 deals in Q3, 2020 in North America.

▪ The S&P 500 was up 8.5% in Q3, registering the best third quarter gains since 2010, which also translated to the S&P’s best back-to-back quarter since 2009.

▪ In India, the IT sector witnessed highest deal activity in H1 2020 with 29 deals. Outbound activity constituted almost half the deal volumes in H1 2020, reflecting higher global intent to acquaint with latest technology and expand local horizons.

▪ IT solutions and software development remained preferred segments in H1 2020, while data analytics, artificial intelligence (AI) and big data firms garnered highest deal values.

GENERAL TRENDS

1414

▪ Consolidation is the key to both growth and survival, as core-expertise can be harnessed more collaboratively.Collaboration over Competition is preferred.

▪ Due to no clear visibility on the future, acquirers are preferring more and more an “earn-out” construct, which limitstheir risk of over-spending on acquisitions. The upfront payment ranged from 15%-51% of the equity value as on thedate of handshake.

▪ Deals are now picking up heavily, post the corona slump. The deal multiples have seen a slight correction, whichbridges the gap between price and value.

▪ The depth of diligences has increased, with more focus on hard-core fundamentals.

BUSINESS MODELS AND INDUSTRY OUTLOOK

1515

▪ With all major economies embracing stringent data laws, “ability to process data locally” will be the key. This is a new avenue for IT companies to pivot to.

▪ Asset-light models are preferred. Companies do not want to pay upfront for their IT needs. SaaS will have further tailwinds.

▪ With the pandemic habituating people to work from home, “on shore deployment” may not be as valuable as it previously was. “Work from anywhere” – becoming a new norm.

▪ IT companies are willing to invest heavily on man-power. Acqui-hires are a major reason for M&As.

ACQUISITION DATE ACCOUNTING

1616

Acquisition method

Applying acquisition method requires all the following steps:

Identifying the acquirer

Determining the acquisition date

Recognizing and measuring the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree

Recognizing and measuring goodwill or a gain from a bargain purchase

Accounting considerations


1717

Other considerations

▪ Non controlling interest (NCI)

• When are financial instruments treated as NCI?

• Measurement of NCI

▪ Pushdown accounting

• Impact of Pushdown accounting on acquired company’s financial statements

• When to make the pushdown accounting election?

▪ Asset v/s Business acquisition

• Cost accumulation model v/s fair value model

▪ Common control transactions

• Accounting for common control transactions (Assets v/s Business)

• Assessing whether common control exists



18

Purchase price allocation

▪ IND AS, US GAAP or IFRS requires allocating the purchase price to the tangible assets and

identifiable intangibles acquired. The balance is Goodwill and that includes assembled workforce –

Purchase price allocation

▪ Identification of intangible assets is critical – Due diligence report, press release – The balance sheet

truly represents the economic reality on the acquisition date.

▪ Deal model is critical - Prospective financial information – Forms the input to intangible valuation

▪ Estimating discount rates – IRR expected from the transaction is a good base, WACC + premium for

intangibles.

▪ Specific nuances for financial reporting valuations and their impact on valuation assumptions

▪ Market participant – Impact on debt equity ratio

▪ Highest and best use – Use in the marketplace vs acquirers intended use

Valuation considerations

Contingent Consideration/ Earn-outs

Due to no clear visibility on the future, acquirers are preferring an earn-out construct, which limits their risk of over-spending on acquisitions.

The upfront payment ranges from 15%-51% of the equity value as on the date of handshake.

Earnouts have become even more attractive for buyers with limited liquidity

Team & Performance is critical to build resilience in this phase. Earn-outs shall incentivize sellers to continue post-closing with the acquired business by providing the seller “skin in the game.”

In many cases buyers are also insisting on longer earn-out periods due to unusual uncertainty over the business’ ability to rebound and sustain in the post COVID era.

In this arrangement, sellers also get compensated fairly, with their rewards linked directly to pre-agreed performance parameters and yardsticks. This exercise also aids vision alignment.

CONTINGENT CONSIDERATION/ EARNOUT PAYMENTS

2020

Overview

▪ Meaning

• Obligation of acquirer to transfer additional assets or equity interests to the former

owners of an acquiree if specified future events occur or conditions are met.

However, contingent consideration also may give the acquirer the right to the return

of previously transferred consideration if specified conditions are met.

▪ Initial measurement of contingent consideration

• Determination of fair value as of the acquisition date

• Payments in future not classified as contingent consideration-

- Amount held in escrow account

- A conditional future payment linked to continuing employment

- Obligations to deliver consideration in the future that are not contingent on the

occurrence of a future event



2121

Classification and subsequent accounting

▪ Initial classification of contingent consideration

• If the consideration does not fall under above criteria classify the same as Equity

▪ Subsequent accounting of contingent consideration

• What are measurement period adjustments?

• Accounting for changes in fair value of contingent consideration that are not

measurement period adjustments


• Right to receive a return of some considerationFinancial assets

• Payment in cash or another financial instrument

• Number of shares based on fixed valueFinancial liability

• Arrangement results in variable number of shares & multiple targets with a fixed number of own equity shares exist

Assess if each target can be viewed as a separate contract


22

OverviewValuation considerations

22

ASC 805/Ind AS 103/IFRS 3 requires contingent consideration to be recognized and measured at FAIR VALUE at theacquisition date as a part of the consideration transferred.

Financial (revenue, ebitda, # of units sold)

vs Non financial metrics

(dispute resolution, regulatory approval

liabilityor equity??

Considerationor

compensation??

Determines the risk associated with contingent consideration pay off.

Non financial metrics - diversifiable - less risky May use a discount rate closer to Kd.

Financial metrics – Risk not fully diversifiable –Discount rate may have a risk premium

Cash settled – Liability

Equity settled (by fixed no. of equity shares) - Equity

Equity settled (by variable no. of equity shares) – Liability*

Payments liked to

continuing employment

is period expense and

not a CC

* a fixed monetary amount to be settled in a variable number of shares, would be a liability


23

Valuation methodologyValuation considerations

1. If the risk of the underlying metric is non-financial/diversifiable e.g. for achievement of a technicalmilestone

Scenario based model

2. If the structure is linear (e.g. a fixed percentage ofrevenues or EBITDA with no thresholds, caps or tiers)

Scenario based model

3. If the risk of the underlying metric is financial AND thestructure has thresholds, caps, tiers or othernonlinearities

Option pricing model

4. If the structure is path dependent (e.g. has a carry -forward or a catch- up provision or a multi - year cap) oris dependent on more than one correlated underlyingmetric

Monte Carlo simulation


2424

▪ Sales Price vs. Payment for Services?

▪ Sellers v/s Buyers perspective

• If treated as sales price - Preferable capital gain treatment and addition to outside

basis

• if treated as payment for services - Ordinary income tax and payroll taxes and tax-

deductible expense

▪ In considering whether an earn-out is purchase price or compensation for services, the

Internal Revenue Service will consider the facts and circumstances surrounding the

payments, though none of them are conclusive in nature:

• Whether the selling shareholder is required to provide services in order to be

eligible for the earn-out payment.

• Whether the selling shareholder is otherwise adequately compensated for the

performance of the required services.

• Whether the total payments made to the sellers when viewed together represent a

reasonable price to be paid for the target.

• How the parties report the payments for both tax and financial reporting purposes.

Taxation considerations

INDUSTRY SPEAKERS


Saurabh DwivediPersistent Systems Ltd

Biplab ChakrabortyTech Mahindra

SPECIAL PURPOSE ACQUISITION COMPANY (SPAC)


UNDERSTANDING THE SPAC LIFE CYCLE

2727

SPAC Life Cycle* Up to 19 Months Up to 5 Months

Formation and IPO Phase

Target Search

SPAC Continues Target Search

Negotiations

Investors Meeting and Shareholder vote

Agreement Reached?

Return to Target Search or dissolve

Not Approved

Yes

No

+8 Weeks Up to 24 Months*

Wind up SPAC and Return Investment to Shareholders

Closing of SPAC Merger(“De-SPAC”)

Approved

SPAC Ceases Target Search

*For illustrative purposes, the SPAC life cycle is based on 24 months timeline to complete a merger.

GAAP APPLICABLE FOR A SPAC TARGET COMPANY

2828

▪ While the targets of SPACs are usually privately held companies, they need to provide financial statements that complywith the form and content requirements of SEC rules and regulations, including SEC Regulation S-X and the US GAAPrequirements of a public business entity for use in the proxy statement or joint statement.

▪ Unwound Private Company accounting alternatives – E.g.: amortization of goodwill

▪ Additional presentation and disclosure requirements (Public Company GAAP) – E.g.: mezzanine equity classification(ASC 4802), segment- and entity-wide disclosures (ASC 280), earnings per share (ASC 260), disaggregation of revenues(ASC 606), and incremental business combination disclosures (ASC 805)

▪ Audit and review considerations

▪ Carve-out financial statements

▪ Cross border considerations

Target Company If determined as predecessor PCAOB Auditing Standards

Target Company If NOT determined as predecessor AICPA Auditing Standards

If Target Company is a division or a component

Does Not Constitute Substantially all of Selling Entity

Carve-out FS of acquired business

If Foreign TargetIf determined as predecessor

(“Backdoor” listing)US GAAP Financials

https://dart.deloitte.com/USDART/home/publications/deloitte/financial-reporting-alerts/2020/spac-transactions#SL675017850-542464

DETERMINATION OF PREDECESSOR

2929

▪ Determination of predecessor in SPAC merger is as below:

Where no clear predecessor, multiple target entities are determined as predecessor

Other factors- Relative size and fair value of the entities, ongoing management structure and operations of merged entity

Predecessor is the acquired business that will constitute the major portion of the business or operations of the combined entities

Judgement is required to determine which entity is predecessor in transactions involving more than one targets

At least one of SPAC target must be designated as predecessor of the combined company

SPAC has no significant activities & will acquire more than one or more targets

IMPAIRMENT ANALYSES IN THE NEW NORMAL


STOCK VS ASSET VS DEEMED ASSET ACQUISITION



3232

Stock v/s Asset acquisition

In general, there are 3 types of acquisitions from a tax perspective:

The buyers and the sellers need to weigh the tax benefits vis-à-vis incremental tax costs in

one structure over the other and even negotiate the difference with aim of achieving overall

tax efficiency.

Taxation considerations

ASSET PURCHASE STOCK PURCHASE DEEMED ASSET ACQUISITION

Buyer’s Preference Seller’s Preference Section 338(h)(10):

Buyer’s Preference.

Seller indifferent in

case of

Tax equalization

Section 338(g):

Buyer’s

Preference.

Seller

indifferent.

Buyer gets FMV basis in assets

(Stepped-up basis) including

intangibles.

No Stepped-up basis. Buyer

gets tax carryover basis in

assets.

Buyer gets FMV basis in assets

(Stepped-up basis) including

intangibles.

Historic Liability stays with the

seller.

Historic Liability transfers to

the buyer.

Historic Liability transfers to the

buyer.

No carryover of tax attributes. Tax attributes carried over

subject to limitations under

IRC Section 382 and 383.

No carryover of tax attributes.


3333

Stock v/s Asset acquisition

▪ Impact on overall valuation of intangible assets

▪ Availability of amortization benefit for valuation of intangible assets under each option

• Market participant

• Highest and best use

Valuation considerations

QUESTIONS


Saurabh DwivediPersistent Systems Ltd

[email protected] Atul DeshmukhKNAV

[email protected]

Shishir LaguKNAV

[email protected]

Rajesh KhairajaniKNAV

[email protected]

Biplab ChakrabortyTech Mahindra

[email protected]

mailto:[email protected]





35

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Canada55 York Street, Suite 401, Toronto, ON M5J 1R7, Canada

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