Taxation Aspects of International

Mergers &
Acquisitions.

Syed Naved Andrabi

April 16, 2008

Andrabi & Gabriel

Advocates Solicitors & Tax Attorneys’
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 Areas of Interest Visited.

 Why Merge?
 Mergers & Acquisition.
 Strategic Management Process.
 Global Mergers & Pakistan Mergers.
 Historical Trends.
 Mergers & Acquisition Pakistan Legislation.
 Stakeholders’ Point of view.
 Tax Consequences.. Acquirer & Acquire.
 Role of Tax Advisors.
 Going Forward.
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 Merger & Acquisition.
The significant corporate activity has made the
market truly global. Once the preserve of local
deals, the mid-market is now the source for
growth in cross border transactions that are
increasingly the norm in both acquisition and
disposals activity. Entrepreneurial businesses
have ever higher expectations of their advisers,
demanding the ability to deliver ideas,
expertise, relationships and resources in a
seamless manner throughout the world’s major
corporate centers.
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 Why Merge?
Financial Motives:
• to reduce risk (the portfolio effect).
• to increase operating efficiency.
• to improve access to financial markets.
• to obtain a tax carry-forward benefit.
• to eliminate competition & enhance profitability.

Other Motives:
• to expand marketing and management capabilities.
• to allow for new product development through R & D.
• to provide synergistic benefits (the “2+2=5” effect).
• To revive sick industry and render accelerated economic growth.
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 Types of Merger

 Horizontal – between business competitors.

 Vertical – Moving up or down the value chain.

 Conglomerate – Unrelated sectors.

 Forward – Merger of target into the acquirer.

 Reverse – Merger of acquirer into the target.

 Triangular – Use of an SPV for undertaking.

 Demerger – Hive-off of an undertaking into a separate

company.
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Modes of Mergers & Acquisitions.

M&A

Amalgamations Acquisitions

Asset Stock
Merger De-merger
Purchase Purchase

Slump Itemized
Sale Sale

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 Mergers & Acquisitions Defined.

Mergers Acquisitions

Two firms are combined on a

One firm buys another firm.
relatively co-equal basis.

 Can be by means of controlling

 Parent stocks are usually retired share, a majority, or all of the
and new stock issued. target firm’s stock.

 Name may be the original or a  Can be friendly or hostile.

combination.
 Usually done through a tender
 One of the partners take over the offer.
dominant management
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 Business Combinations.
According to International Financial Reporting Standard 3
(IAS 22-Withdrawn)
Business Combination.

“The bringing together of separate entities or businesses into one reporting

entity.”
Where the result of business combination is that one entity, the acquirer,
obtains control of one or more other businesses , the acquiree.

Business Combination Involving entities or businesses under common

control.

“A business Combination in which all of the combining entities or businesses

ultimately are controlled by the same party or parties both before and
after the combination, and that control is not transitory.”

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 Corporate Mergers & Acquisition.

Direct Stakeholders.
 Enterprises / Companies.

• Shareholders.

Other Stakeholders.
 Customers.
 Creditors/Suppliers.
 Employees.
 Government Authorities, e.g., Tax Authorities.

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 The Strategic Management Process.
External
Analysis

Mission Objectives Strategic Strategy Competitive

Choice Implementation Advantages

Internal
Analysis Which Business to Enter

1) Vertical Integration
Corporate Level 2) Diversification
Strategy
Mode of Entry

Strategic Alliances

10 Merger & Acquisitions

 Top Ten Mergers-2008
Target Name Acquirer Name Deal Date $ Value of
Deal (M)
Yahoo! Inc (YHOO) Microsoft Corp (MSFT) 02-01-2008 43,711.60
Inmobiliaria Colonial SA Investment Corp of Dubai {ICD} 01-31-2008 15,213.20

Rio Tinto PLC Shining Prospect Pte Ltd. 02-01-2008 14,284.20

Alcon Inc (ACL) Novartis AG 04-07-2008 10,547.50
Bolsa de Valores de Sao Paulo {Bovespa} Bolsa Brasileira de Mercadorias 02-20-2008 10,309.10
{BM&F}
Millennium Pharmaceuticals Inc Mahogany Acquisition Corp 04-10-2008 8,734.10
(MLNM)
Citigroup Inc (C) Government of Singapore 01-15-2008 6,880.00
Investment Corp Pte Ltd {GIC}
Weyerhaeuser Co-Containerboard International Paper Co (IP) 03-17-2008 6,000.00
Packaging & Recycling Business

MMX Mineracao e Metalicos SA-Certain Anglo American PLC 01-17-2008 5,500.00

Assets
Scania AB Volkswagen AG 03-03-2008 4,377.50

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Deal Wise Mergers.

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 Prominent Mergers in Pakistan.
2006
S Name of Company New name of the Date of Paidup Ratio
r.N company/merged with Merger Capital
1o Second Tri Star Modaraba First Tri Star Modaraba 10/04/2006 128.700 [ 1.817:1 ]
2 ABAMCO Growth Fund UTP Growth Fund 06/06/2006 275.625 [ 1.845001:1 ]
3 ABAMCO Stock Market Fund UTP Growth Fund 06/06/2006 875.000 [ 0.970229:1 ]
4 ABAMCO Capital Fund UTP Growth Fund 06/06/2006 2,029.420 [ 0.898072:1 ]
5 WORLDCALL Multimedia Ltd WORLDCALL Telecom Ltd 09/06/2006 530.000 [ 1 : 1.27 ]
6 WORLDCALL Broadband Ltd WORLDCALL Telecom Ltd 09/06/2006 1,500.000 [ 1 : 1.09 ]
7 WORLDCALL Communication Ltd WORLDCALL Telecom Ltd 09/06/2006 1,831.702 [ 1 : 1.42 ]
8 Modaraba A1-Tijarah Modaraba A1-Mali 11/07/2006 75.778 Certificate
[ 91 : 2 ]
9 Atlas Investment Bank Limited Atlas Bank Limited 26/07/2006 506.024 [ 1 : 3.14 ]
10 Pakistan Papersack Corporation Ltd Thal Limited 04/08/2006 68.993 [ 3.07 : 1 ]
11 First Allied Bank Modaraba Allied Bank Limited 25/08/2006 350.000 [ 1 : 024 ]
12 Colony Textile Mills Limited Colony Mills Limited 28/08/2006 250.000 [ 1 : 9.50 ]
13 Union Bank Limited Standard Chartered Bank 29/12/2006 3,387.505 [ 1 : 2.50 ]
Ltd
14 Jahangir Siddiqui Inv.Bank Ltd JS Bank Limited 30/12/2006 853.125 [ 1 : 3.24 ]
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 Prominent Mergers in Pakistan.
2008
S Name of Company New name of the Date of Paidup Ratio
r.N company/merged with Merger Capital
1o PICIC Commercial Bank Limited NIB Bank Limited 01/01/2008 2,734.875 [ 1 : 2.27 ]

2 Pakistan Industrial Credit & NIB Bank Limited 01/01/2008 4,152.720 [ 1 : 3.18 ]
Investment Corp. Ltd (PICIC)

2007
S Name of Company New name of the Date of Paidup Ratio
r.N company/merged with Merger Capital
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o Guardian Modaraba B.R.R. International 25/05/2007 244.695 [ 1 : 1.22 ]
Modaraba
2 Crescent Standard Investment Innovative Housing Finance 20/07/2007 1,257.610 [ 0.005 : 1 ]
Bank Ltd Limited
3 Dewan Hatter Cement Limited Dewan Cement Limited 22/10/2007 2,565.000 [ 1 : 0.75 ]

4 Suzuki Motorcycles Pakistan Ltd Pak Suzuki Motor Company 29/10/2007 438.989 [ 21 : 1 ]
Ltd
5 International Housing Finance Ltd KASB Bank Limited 22/11/2007 450.000 [ 1 : 1.30 ]

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 India

France

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 United Kingdom.

United States of America.

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 Historical Trends.
FIRST WAVE (1893-1904).
 Time of the major horizontal mergers.
 Major mergers were in Steel, Telephone, Oil, Mining, Railroad
etc.
 The First World War caused end of the first wave.

SECOND WAVE (1919-1929).

 The period in which vertical integration started.
 The major automobile manufacturers emerged in this period. For
example, FORD.
 The 1929 Crash and the Great Depression ended this wave.
THIRD WAVE (1955-1973).
 In this period the conglomerate concept took hold.
 Major conglomerates were IT&T (Harold Geneen) LTV
(Jimmy Ling) Teledyne (Henry Singleton) Litton (Tex
Thornton).
 The conglomerate stocks crashed
17 in 1969-70.
 Historical Trends.
FOURTH WAVE (1974-1989).
 Generally referred to as the merger wave, or takeover wave.
 It ended in 1989-90 with the collapse of the junk bond market,
along with the collapse of the savings and loan banks and the
serious loan portfolio and capital problems of the commercial
banks.
FIFTH WAVE (1993-2000).

This was the era of the mega-deal.

 Mergers of Citibank and Travelers.
 Chrysler and Daimler Benz.
 AOL and Time Warner.
 Vodafone and Mannesmann.

It ended with the bursting of the Millennium Bubble and the

great scandals, like Enron, which gave rise to the revolution in
corporate governance.
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 Historical Trends.
SIXTH WAVE (2002 Onwards).

Principle factors are:

 Globalization.
 Encouragement by the governments of some countries (e.g.,
France, Italy and Russia) to create strong national or global
champions.
 The rise in commodity prices.
 The availability of low-interest financing.
 Hedge fund and other shareholder activism.
 Tremendous growth of private equity funds.

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 Controlling Authorities.

NBFI’s SECP
Banks SBP
Other High Court
The Competition Commission of Pakistan
(CCP-Monopoly Control Authorities) has
oversight in respect of all mergers.

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 Legislation Dealing Mergers in a
Particular Sector.
For Banking Companies. Section 48 of the Banking Companies
Ordinance, 1962

282L of Companies Ordinance, 1984

For N.B.F.Cs

Section 67 to 71 of the Insurance Ordinance,

For Insurance Companies. 2000 and application to High Court

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 Specific Laws Dealing Mergers.

Section 287 to 289 read with Section 282L & 284 of the
Companies Ordinance, 1984 applies to mergers involving
companies incorporated under the laws of Pakistan.

Section 2 (1A); 20 (3); 57A, 97; 97A & Clause 62 of Part

IV of Second Schedule to the Income Tax Ordinance,
2001.

Section 11 of Competition Ordinance, 2007.

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Legislation on Foreign Investment.

Board of Investment and Foreign Exchange

Regulation contain certain exceptions and
restrictions for non-residents for which
general or special permission is required.

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 Section 2 (1A) of the Income Tax Ordinance,
2001
Amalgamation means the merger of one or more
3. banking companies or
4. non-banking financial institutions, or
5. insurance companies, or
6. companies owning and managing industrial undertakings or
7. companies engaged in providing services and not being a trading company or
companies.
In such manner that –
The assets of the amalgamating company or companies immediately before the
amalgamation become the assets of the amalgamated company by virtue of the
amalgamation, otherwise than by purchase of such assets by the amalgamated
company or as a result of distribution of such assets to the amalgamated
company after the winding up of the amalgamating company or companies; and

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Section 2 (1A) of the Income Tax Ordinance,
2001
The liabilities of the amalgamating company or companies immediately before
the amalgamation become the liabilities of the amalgamated company by virtue
of the amalgamation

Requisite criterion
One company must be a public company or
A company incorporated under Companies Ordinance,1984 or under any
other law for the time being in force,

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 Merger/Amalgamation.

From
Members/Shareholders
Point of View

From the Point of View of From the Point of View of

Company to be
Amalgamated
Merged/Amalgamating.
Company.

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 From Members/Shareholders Point of View
Is exchange of shares treated as Dividend?
Taxability regarding exchange of shares?
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• [S. 2(19)(a)] - “Dividend” includes
distribution of accumulated profit
entailing release of assets of the
company possessing profit.
• [S. 2(19)(c)&(d)] - Distribution on
liquidation or reduction of capital
• In merger / amalgamation, no
distribution of accumulated profit takes
place thus no release of asset.
• Section 37 (5) - Shares are Capital Asset
• No “Disposal” i.e. sale / transfer /
exchange / relinquishment etc. involved.
• If exchange / relinquishment is treated as
“Disposal” even then no gain / loss arises
 From the Point of View of Company to be
Merged/Amalgamated.

Taxability of gain on transfer of assets and • S 97 & 97A - No gain or loss is taxable
liabilities? subject to certain conditions.

• Amalgamating companies are resident

and belong to wholly owned group.

• In case of Section 97 the condition of

both companies to be resident shall not
apply in light of clause 62 of Part IV of
2nd Schedule.

• Gain of amalgamating companies are

taxable if the above criteria is not
fulfilled under the Income Tax
Ordinance, 2001
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 From Amalgamated Company Point of View.
Tax value of assets / liabilities acquired? • S 76 - Relating to cost of purchase.

• S 98C, concerning succession.

• The tax value of assets in the hands of

amalgamating company (immediately
before amalgamation) shall be taken
as the tax value for amalgamated
company

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From Amalgamated Company’s Point of View.

What about goodwill taxation?  • Goodwill an intangible or capital asset

– a dilemma?

• Treatment of goodwill?

• Difference between ‘Tax-value’ and

‘Accounting value’ of assets?

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 From the Amalgamated Company’s Point of View.
What is the treatment of merger related
expenses?
What about carry forward and set-off
of losses sustained by the
amalgamating company ?
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S 20(3) - Only expenditures incurred
under following heads are tax
deductible –
•Legal Advisory Services
•Financial Advisory Services
•Administrative expenses –
Planning and Implementation of
amalgamation
S. 57A - In the year of amalgamation only
assessed loss of the amalgamating
companies for the tax year is available
for the set off. The facility to set off
accumulated losses of amalgamating
companies has been taken away from
July 01, 2007.
Tax Consequence in Case of
Acquisitions.

Acquirer point of view

Acquiree point of view

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 Acquirer Point of View.

• In case of non-arm’s length transaction the fair market

value may be treated as consideration as cost of
acquisition [S. 76 & 78]

• Tax treatment for payment of goodwill.

• Tax deductibility of consideration paid under restrictive

covenants ?

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 Acquiree Point of View.

• Transfer of assets and liabilities have tax implications

depending on the basis of nature of asset.

• Consideration may be taken at higher of the actual selling

price or Fair Market Value [S. 77]

• Slump sale principle – Applicability ? [S. 77]

• Consideration under restrictive covenant – whether capital

or revenue?

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 Role of tax Advisor in Mergers &
Acquisitions.
 International mergers and acquisitions require
appropriate planning.
 Planning will end after consideration of domestic
laws effect on home country & other country
laws.
 Effective consideration will be whether to merge
or acquire.
 If to acquire consideration to be given to manner
of acquisition.
 To acquire the business as a whole, slump
transaction or through shares or as an asset
purchase.
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 Going Forward.
 Consistency in Policies.
 Facilitate & Encourage Regional Mergers.
 Level Playing Field.
 Conducive Industrial Environment for Intra
Regional Investment.
 Common Legislation.
 Removal of Trade Barriers.

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Thank You

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