Carve-outs –
strategic business,
finance and tax
considerations
Wednesday, March 22, 2017
Global life science
M&A landscape
DRAFT
M&As continued with the “new normal” of total deal
value >US$200b; divestitures constituting a major chunk
Life sciences M&A by year
900
350
800
300
700
600
New normal: $200b+
250
500
200
400
150
300
100
200
50
100
0
20
0
2011
2012
2013
2014
Deal amount (US$b)
0
-20
-40
-60
-80
-100
-120
-140
Source: Thomson One
Page 2
Life sciences divestitures by year
Biotech
Pharma
Medtech
CBI
2015
2016
Deal volume
Deal amount (US$b)
400
DRAFT
Life sciences sector
The number of deals remained strong in 2016 across both strategic and financial buyers
Financial vs. strategic buyers – No. of deals*
* Deals from 2005 through Feb 22, 2017
Source: Capital IQ,
Page 3
CBI
DRAFT
Global Corporate Divestment Study
Highlights
43%
plan to divest in the next two years
76%
of companies feel that their last major divestment created
long-term value, down from 84% last year
88%
of companies generate a sale price above expectations when
they understand the forces affecting the sector and business
41%
of companies believe they held on to assets too long
Participant profile
Page 4
►
1,000 executives from 60 countries and 10 industry sectors
►
78% CEOs, CFOs or other C-level executives
CBI
DRAFT
Key life sciences findings
56% Build “Firepower” for M&A in focus growth areas
38%
life sciences companies plan to divest in the next two years
68%
Spend time on separation and act early; 58% highlighted saving opportunities for
buyer
41%
87%
Page 5
held assets for too long that they felt they should have divested
Evaluate contingent consideration to complete deals 60% view R&D success as
critical milestone for contingent consideration
CBI
Panel discussion
Panelist introduction
Moderator:
Subin Baral
Divestiture Advisory Services
Ernst & Young LLP
Panelists:
James D’Arecca
Chief Accounting Officer
Allergan, Inc
Vineeta Dinesh
Senior Director, Acquisitions and
Divestiture Operations
Johnson & Johnson
Dr. Nancy Stempin
Executive Director
Ernst & Young LLP
DRAFT
Strategic considerations and timing
►
►
►
Portfolio review process
►
Rigor of process can help identify divestiture or growth opportunities before you are
forced to act
►
Embed analytics into portfolio management
Timeline to plan and execute
►
A successful divestiture may be longer than you expect
►
Key challenges exist
Use the time to enhance value
►
Page 8
Perform tax structuring and communication of upside
CBI
DRAFT
Buyer pool assessment and impacts
►
Buyers may have different financial information needs
►
►
“Deal” vs. “GAAP-audited” financials
►
►
Strategic vs. financial buyers
Basis and perimeter may be different
Buyer pool can impact transaction form
►
Page 9
Sale, joint venture, IPO or spin-off
CBI
DRAFT
Financial statement preparation challenges
►
IT systems may not support the process
►
Manual identification of assets/liabilities
►
►
Shared legal entities
P&L allocations
►
Corporate overhead and other costs may not be included in historical “management”
reporting
►
Lower materiality
►
Income taxes, goodwill and pensions
Page 10
CBI
DRAFT
Separation issues
►
►
Stand-alone cost estimates
►
Key challenges
►
Often reflect significant assumptions
►
Can offer a common language to provide context to operations to multiple buyers
Transition services arrangements (TSAs)
►
Page 11
Advanced preparation can minimize use or reduce timelines
CBI
DRAFT
Typical divestiture process
Role of Accounting
Day 0
Strategy
Prepare
Report
Close
Beyond
Confirm value
Secure value
Deliver and retain value
Deliver and retain value
Position
business
for sale
Planning
and
preparation
Accounting impact of
deal structure –
identify risks and ops
►
►
Provide insight on
valuation methods
►
►
Value review in the
areas of accounting
and finance
systems/policies
►
►
►
Finance planning
Issue
Teaser
Member of separation
project management
office (PMO)
►
Pro forma
►
Due diligence support
Management presentation
►
Bidder Q&A
►
Close down outstanding buyers’ due
diligence questions
►
Stranded cost management
►
Identify any
impairments/write-offs
Prepare data for
businesses for sale
►
Prepare accounting
white paper
TSA drafting contribute
and review for impact
in accounting
treatment/potential
deferral
►
Postcompletion
►
►
Goodwill and held-forsale asset
considerations
Negotiation
and
completion
Review sale
agreement
Identify stand-alone
issues
Prepare transaction
financials/audits
Buyer
diligence
►
Operational carve-out
implementation
►
Page 12
Issue
sell-side
report
►
Accounting
►
Issue IM
Identify TSA for
finance and
accounting
►
►
Day 2
Identify value
Strategic
review
►
Day 1
►
Carve-out systems
►
Disclosure
►
Record and move assets/liabilities
►
►
Create/review SEC filings if applicable
Execute under TSA/transition
manufacturing arrangement (TMA)
►
Create accounts for TSA if necessary
►
Transition TSA/TMA activities
►
Ensure segregation of TSA/TMA
►
Bill TSA/TMA
►
Support audit if applicable
►
Close out TSA/TMA
►
Support disclosures and filing
►
Assess impact on controls
►
True up contingent purchase price adj.
Create billing
Due diligence
questions
►
Cut off procedures
►
Review allocations
CBI
Establish Day 2 Governance
►
►
Statutory support
Continue the focus of the PMO as a
member
Create disclosures
Finalize transaction
financials
►
►
Postcompletion
Track performance against the metrics
of the deal
Value optimization
Identify content
required for disclosure
►
Close
►
►
►
Transition
►
Accounting for TSA/transition
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