private equity club simplification presentation · pricewaterhousecoopers llp slide 21 september...

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PricewaterhouseCoopers LLP PwC

Private Equity ClubCorporate SimplificationTuesday 19 September 2006

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PricewaterhouseCoopers LLP

Agenda/Contents

Section 1- Complexity: WhatComplexity: What’’s the issues the issue

Section 2 - Operation Costs and Complexity

Section 3 - Structural Cost and Complexity

Section 4 - Conclusions

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Slide 3PricewaterhouseCoopers LLPSeptember 2006

Why is Complexity Reduction on the Agenda?

Regulation -

Sarbanes Oxley and IFRS

Costs – More value for less costMerger integration

Governance & Legal –Speed and visibility of responses

Increase Tax regulation

Information –Decision support

Processing economiesControl

Gordian Knot

Section 1:

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Trends in Reducing Complexity….…..over the last 10 – 15 years we have seen…

Toll Manufacturing

& Servicing

Shared Services

Commissionaire Structures

Branch Structures Call Centres Outsourcing

Centralised Distribution

Post deal integration

Cash Pooling

Typically this has been technology led consolidation delivering a variety of activity based point solutions

Section 1:

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Complexity manifests itself in 3 main ways producing higher Costs:

– Operations – life cycle costs, benchmarks, duplication, reinvention

– Management Governance & Legal – slow and complex decisions, layers, resistance to change, failed initiatives, poor alignment

– Structures – Legal entities, reporting, inter-unit activity, complex tax models

Section 1:

Complexity that does not add value to customers or creates drag on the organisation should be removed

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Integrating the approach enhances the value

OperationalTechnology changeCustomer consolidationIncreased competitionRemoval of non value activities

Tax & Regulatory Directors DutiesSarbox & IFRSIncreasing Tax constraints on debt push down

DealMerger integrationDivestment structuringIPO

OperationalPerformance managementProcess costsCustomer managementFacilitating the Tax advantage

Tax & RegulatoryClarity on riskVisibility & controlLean corporate centreRelease dividend trapsTreasury arrangements

DealCorporate ValueReporting regulations

Value is created by integrating these normally discrete activities

DRIVERS Value

Tax

Operations

Legal

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Agenda/Contents

Section 1- Complexity: What’s the issue?

Section 2 – Operational Cost & complexityOperational Cost & complexity

Section 3 - Structural Cost and Complexity


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Transactional

Management

Business Analysis

Decision Support

Investment Appraisal

Cost Management

Tax Planning

ManagementReporting

Budgeting & Forecasting

TreasuryManagement

ConsolidationAnd reporting

Planning

Routine Reporting

Fixed Assets

Travel & Expenses

Accounts Receivable

ReconciliationsIntercompany

Cash and Banking

Accounts Payable

Process ownership

Control environment

Payroll

Global Standards / Automation / Offshoring

Distributed/Aligned to the

business

Decision Support

Centre of Excellence / Online / Predictive

Modelling

Operational Complexity – typical initiatives

C- level: Are likely to remain focused on governance and performanceThe latest focus of change:

Decision quality, visibility and performance management are the focus

Tier 2 management structures are significant to Tax and legal benefits

Activity based integration: Historically a key area of focus, with integration now common place.

Complexity is inherent in organisational development, managing this out is central to corporate performance

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For all functions, there is a continuous integrated journey

Organisations are already aware of the integration challenge but the focus is moving to. Simplification of:

Delivering greater visibility through improvements in information flow

Establishing a systems base to manage performance and facilitate the control model

Establishing a decision making and operating model which facilitates the structure

Mininising headcount through economies and best in class processes

RemoveComplexity

Standardiseprocesses

commonSystem

Establish neworganisation

Removecomplexity


commonSystem

Centraliseprocessing


Removecomplexity Standardiseprocesses Centralise processing Implement e.enabledcommonSystem

Migrate to virtualprocessing

Removecomplexity


Removecomplexity

contracted

Systems –

Multiple

Process -Non-Standard

Complex

Diversity &Inconsistentperformance

People

People

Process –Standard/Simple

Systems - Common

Consistent &managed

performanceManaged

performance

Standard/SimpleProcesses

Systems - Common

PeoplePeople


e.enabled system

People

Diversity &known

performance

ProcessStandard/Simple

Systems –

Multiple

People


ProcessNon-Standard

Simple

Systems –

Multiple

Cost by function Effort needed

RemoveComplexity


commonSystem


Removecomplexity


commonSystem

Centraliseprocessing


Removecomplexity Standardiseprocesses Centralise processing Implement e.enabledcommonSystem

Migrate to virtualprocessing

Removecomplexity


Removecomplexity

contracted

Systems –

Multiple

Process -Non-Standard

Complex


People

People

Process –Standard/Simple

Systems - Common

Consistent &managed

performanceManaged

performance


Systems - Common

PeoplePeople


e.enabled system

People

Diversity &known

performance

ProcessStandard/Simple

Systems –

Multiple

People


ProcessNon-Standard

Simple

Systems –

Multiple

Cost by function Effort needed

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Cost in Management is more subtle, and critical….

Complex decisionComplex decisionmakingmaking

Failing projectsFailing projects

Different view Different view of authorityof authority

Legal Legal responsibilityresponsibility

Rewards and Rewards and reportingreporting

Direction and Direction and impactimpact

Resistance to Resistance to changechange

Slow adoptionSlow adoption

What stops change?- Mental Models

- Authority and Role- Objectives and Reward

Challenges

Change agents

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Simplification helps reduce these challenges and facilitate benefits from new areas

√

Central TeamFinanceManagement reportingITGovernance & AdministrationSupply ChainManufacturingProcurementProducts & customer

Degree of local resourcesDegree of central resources

Activity Local Collaborative Co-ordinated CentralIn Finance, complexity is being driven out…and costs are moving from 3-4% of revenue to 1% or under

In Procurement & Logistics, significant buying costs and inventory are now being driven out

IT spend is increasingly being targeted in non core activities

The move away from integration through technology creates a broader range of opportunities

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Example: Post merger simplification

76%

58%

56%

47%

43%

34%

0% 20% 40% 60% 80% 100%

Time & resources required to implement plans whilst continuing

Business as Usual

Ambitious targets set in acquisition plans are hard to achieve

Understanding of impact of cultural issues on integration

Specific skills are required to deliver the plans

Acquisition plans are not specific or detailed enough to implement

Lack of top management sponsorship and support

% ranked as priority no. 1, 2 or 3 out of 6

Managing the balance of integration whilst delivering core business is seen as the toughest challenge

Typical integration challenges

Aligning senior management of the two organisations on integration strategy, objectives, principles and priorities

Assessing the progress with integration planning and delivery against expectations

Dealing with conflicting priorities for management focus and best resources between integration and business as usual

Developing and executing an optimised business model to drive cost synergies, operational synergies and decision making

Quickly leveraging the increased procurement volumes and “best of both” terms.

Identifying and managing tasks that need to be completed across the business to be ready for Day 1 (completion date)

Reviewing and optimising the property portfolios of the merged business

Dealing with regulatory restrictions on sharing of market/price sensitive data until completion

Addressing the cultural issues that will exist between the two organisations

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Example: Post merger simplification

Page 6PricewaterhouseCoopers

Boots/ UnichemDecisions that will influence integration and its pace

StoresOne fascia/brand, entrepreneurial vs managed culture, pharmacist vs retailer, promotional policy,

consistency of fit -out, local vs. central control, maintenance philosophy, food vs drugs?

Wholesale operation

• Trade ‘experience ’• Volumes and

regions• Legislation• Capex and

maintenance• Target cost to sell• EPOS system and

scalability• Disposals?

Merchandising

• Range and brand choices eg No.7 and Basics

• Promotions management

• Local flexibility vs. central control

• Management of larger range

• IT Systems and tools

Supply Chain/ replenishment

• Central vs. local role

• WMS choice?• Stock management

and reordering• New product

introduction• Outsource options?• Shrinkage

Store operations

• Customer ‘experience ’

• Stores to close or dispose

• Capex and maintenance

• EPOS systems• Store style - ‘Look

and feel ’• Regional strategy

Central and Administration – Nottingham vs London? One head office, integration of finance (where), IT systems and management reporting templates,

HR, marketing, property and estates,

Buying

• Department integration

• Buying team selection

• Supplier negotiations

• Benefiting from group volumes

• Pricing strategy

Manufacturing

• Future role within AB

• Disposal?• Drive available

improvements• Expand products

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Agenda/Contents

Section 1- Complexity: What’s the issues?


Section 3 – Structural cost & complexityStructural cost & complexity


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The Conventional Tax & Legal Structure

EuropeanHolding

Company

France Germany Italy Spain UK

ABC Group

…. But this leads to

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ABC GroupIP

Sweden

Italy

Ireland

Hungary

CustomerFrance

CustomerItaly

CustomerIreland

CustomerHungary

Transaction flows (= purchase of raw materials, sale of finished goods)Royalty payments

Third Party Vendor

Third Party Vendor

FULL-RISK MFRSSUPPLIERSFULL-RISK SALES COs

CUSTOMERS

Spain

UK

Conventional business model – illustrative transaction flows

Germany FranceThird Party Vendor

Third Party Vendor

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Key:

Corporation Branch

Germany

SingleEuropean Entity

UKUKItalyFrance

Alternative 1: “Strawman” legal branch structure utilising Single European Entity framework

ABC group IP

Big impact of Alternative 1:

•Elimination of inter-company processing

•Eliminate components of corporate and statutory governance

•Statutory filings & associated costs are reduced

•Systems simplified and reconciliations reduced

•Control environment simplified

•No VAT on Services between SEE branches

•Limited requirement for audit or public disclosure of branches.

…Not a tax play: no functional change …

•SEE can accommodate both the manufacturing and sales function.

•SEE can be Societas Europaea or existing national company

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• Protection of existing parent and local country tax attributes (e.g. tax losses)

• Minimisation of parent and local country tax cost on transition (e.g. transfer taxes, capital gains) and on an ongoing basis (e.g. attribution of profits, CFC/Subpart F)

• Review of special purpose vehicles and impact on future tax planning

• VAT and Customs considerations

Human Resources

• Worker participation and unions• Employee remuneration, personal

tax and pension arrangements• Transfer of employee contracts• Local management impact

• Redesign of back office processes

• System reconfiguration• Treasury and cash

management• New or different administrative

structure requirements

• Method of effecting new structure (e.g. legal mergers, transfer of assets)

• Management of third party consents (e.g. bankers, vendors, distributors)

• Regulatory constraints• Commercial risk profile• Transfer of contracts and real

estate

LegalTax

Accounting/Finance/IT

Operations

• Degree of change required

• Customer perception• Stakeholder

management• Complexity/timing

of transition

Alternative 1 – The Key Issues to be Managed

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The Conventional Tax & Legal Structure

Pros and cons of the SE

Pro’s

PLC

European entity

Migration

Cross border mergers

Con’s

Timing

Worker participation

US tax

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Customersproduct

Productionand supply plans

managementinformation

invoicesdemand plans

raw materialrequirements

product

Material flow

Information flowLegal flow

Other servicesSSC / R&D

Rawmaterials

orders and/orrelationships

Entrepreneur

Suppliers

Factories

Regional/Centralwarehousing

Toll/ContractManufacturing

Limited risk distributor,

commissionaire, agent

Alternative 2 – Simplified Functional Organisation

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Third Party Vendor

Third Party Vendor

Third Party Vendor

Third Party Vendor

ABC GroupIP

TOLLERSSUPPLIERS

IP OWNER

France

Italy

Ireland

Hungary

LIMITED-RISK SALES COs*

Service fee (i.e. tolling)Transaction flows (= purchase of raw materials, sale of finished goods by Entrepreneur)Royalty payments

*These could be limited-risk distributors, commissionaires or commission agents.

Germany

Spain

CustomerFrance

CustomerItaly

CustomerIreland

CustomerHungary

CUSTOMERS

Big impact of Alternative 2:

• Central decision-making for manufacturing and distribution activities.

• Conversion of manufacturing plants from entrepreneurs to service providers (tollers).

• Significant reduction in intra-group transactions.

• Simplified P&Ls of manufacturing and limited-risk sales companies (and governance reduction).

Multi-territory customers

Direct sales

Alternative 2: “strawman” simplified functional organisation –transaction flows

EntrepreneurSwitzerland

Key:

Corporation

Sweden

UK

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Why tax advantage Alternative 2?

helping justify and improving project returns by adding tax savings to the operational savings;

ensuring that operational change does not create tax exposure, risk or incremental cost;

providing additional funds for reinvestment in the business;

reducing administration and associated costs

Increasing theafter-tax returnfrom the new

business model

Business change initiatives are bringing operational benefits ...

… tax can add value to the operational benefits, achieved through operational centralisation, by:

Benefits

Tax benefits

Operational and supply chain benefits Time

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Two approaches to European Simplification

Centralisation

SimplifyFunctional

Organisation

EntrepreneurModel

ReduceLegal

EntitiesSingle Entity

Legal Structure

Benefits• Supply chain rationalisation and

savings• Improved business control• Possible reduction of intragroup

transactions and of tax crystallisation

• Potential for tax advantaging

Benefits• Improved business control• Reduction/elimination of

intragroup transactions• Reduced corporate governance

requirements• Reduced direct and indirect tax

filing where no fiscal entity i.e. in most EU countries

Alternative 1

Alternative 2

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EntrepreneurCo

Support Co

France Germany UKSpainItaly

• Entrepreneur• Primary risk taker• Key decision makers• High profit

• Single Entity Legal Structurewith localbranches

• Manufacturing, distribution, etc.• Low profit

Key:

Corporation Branch

Alternative 3 - Integration of Alternative 1 and Alternative 2 combining commercial benefits and administrative and structural savings

…the commercial, administrative and structural savings can be tax advantaged if this is possible or beneficial to the client..

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IP OWNER

Main Impact:

• Incorporates benefits of Alternative 1 and Alternative 2

•Reduction in administrative and infrastructure costs (e.g. auditcosts, filing costs, company secretarial, IT costs).

•Further reduction in intercompany transactions.

Third Party Vendor

Third Party Vendor

Third Party Vendor

Third Party Vendor

EntrepreneurSwitzerland

ABC GroupIP

SUPPLIERS

Service fee (i.e. tolling)Transaction flows (= purchase of raw materials, sale of finished goods by Entrepreneur)Royalty payments

Toller(eg. Germany)

Ger Sp UK Swe

Limited-risk Sales Co(eg. UK)

Fr It Ire Hung

CustomerFrance

CustomerItaly

CustomerIreland

CustomerHungary

CUSTOMERS

Multi-territory customers

Direct sales

Alternative 3: “strawman” centralised functional and legal branch structure

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Agenda/Contents

Section 1- Complexity: What’s the issues?


Section 3 – Structural Costs and Complexity

Section 4 - ConclusionConclusion

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Tax Delivery and Realisation Time-Line

Evaluation / Due diligence• Identify and evaluate proposition

Feasibility• Validate value proposition

DevelopPlan

Implementation• Roll-out /Go-live

Post implementation• Review

Pre-Acquisition

0 Months 2 - 3 Months 3 - 6 Months 6 - 9 Months 9 Months +

• Understand inheritedoperating modeltax footprint /risksvalue chain

• Model tax savings & operations

• Identify deal structure

• Strawman model• Model benefits / costs

• Road block identification

• Tax due diligence• Legal / systems due diligence

• Finalise model• Finalise roles / location

• Finalise processes

• Determine roll-out strategy

• Go-live• Feedback• Manage change

• Validate “substance”

• Eliminate risks pre-disposal

Post Acquisition

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Summary of approach

Value

Time

Experience

Improved decision making, visibility of performance & transactional activities to

reduce costsExit price improvement

Reduction in governance costs and risks by

devolving the complexity

4 – 18 months implementation depending

on the level of change

The Design and evaluation of the conversion of the European division to a centralised sales model

Implementation of a brand management company

and a low-risk sales model

Alignment of business operations with legal/fiscal

framework and the reduction in intercompany transactions

…. why wouldn’t you do this?

Rapid delivery through a established methodology and an experience team

Starting pre deal improves the speed and

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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2006 PricewaterhouseCoopers LLP. All rights reserved. 'PricewaterhouseCoopers' refers to PricewaterhouseCoopers LLP (a limited liability partnership in the United Kingdom) or, as the context requires, other member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity. PwC

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private equity club simplification presentation · pricewaterhousecoopers llp slide 21 september...

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