Gentherm closed two deals in July of 2022. One was a German multinational that added to the company's automotive space. The other was a domestic acquisition in China for its medical business. The deal required careful financial considerations from the company's Executive Director, Global Tax & Treasury, Kate Rivard.
"As a U.S. multinational, looking at my tax structure, my banking profile, I really had to be mindful of how I was planning to finance it and how I was going to actually advise and complete the acquisition in order to set us up for success," Rivard said at the 2023 Detroit Smart Business Dealmakers Conference.
There were a lot of nuances because it was a German family-owned business that wasn't a U.S. GAAP reporter, so there were a lot of accounting considerations that affected integration. It also meant there were things that the company prepared for that didn't occur exactly the way they thought.
"I think it just goes to show that no matter how prepared you are, you're still going to have risk," she says. "But overall, we did a good job de-risking the deal."
The biggest risk in China, she says, were the COVID restrictions that were in place at the time. Gentherm didn't have the ability to send its subject-matter experts on site to see what was really going on. They instead used their automotive business in China to help support the acquisition.
And with the German acquisition, it was a totally different marketplace.
"They had totally different financing than we did as a U.S. public company," she says. "And the insurance market is actually fairly different between Germany and the U.S. So, understanding those risks and nuances are pretty big."
In tackling insurance systems, for instance, she says she thought she was going to have some quick wins on synergies and be able to show a lot of value-add on the insurance side. But when they got into it, what she says they realized is how in the diligence period the sell side is still putting their best foot forward.
"There are things you're going to miss," Rivard says. "And one of the things that happens is sometimes you don't realize how their risk profile compares to yours in actuality. What we noticed after the fact is it wasn't as easy to get all of those insurance synergies. So, I think in hindsight, I probably would have tempered my expectations there. That wasn't necessarily anything that created a risk after the fact that negatively hurt us. It just reduced the upside."
Something that worked to their benefit, she says, was that the company got involved early in the deal with their banks. As she was already in the process of renegotiating their credit agreement, she asked to put the deal into it.
"I got really lucky because we did all of this that first week of June right before the Fed raised interest rates 75 basis points for the first time," she says. "So, I got a lot of benefit by being really proactive and telling my bank group up front what I wanted to do. That included my tax structure. I said these are the deals, this is what I want it to look like and this is what I'm going to have to do to manage my tax risk. And I built all that into my credit agreement. You don't always have the opportunity to do that. But when you can, I think what you'll see now is we have a relatively low cost of debt compared to the market because we were able to put in some really good terms upfront."
But from a tax perspective, the German deal had its drawbacks.
"If you want to have a really nice, low effective tax rate, don't buy a company in Germany."
Tax liabilities, when dealing between countries, need to be thought through or money can get left on the table. And there's risk in both the effective tax rate as well as the cash tax profile.
"When you're buying a company and you're looking at it, maybe you're looking at something where you think you're going to have a synergy when you bring it in. You think you have the ability to improve your overall tax profile. But when you get there, you might find they have some tax attributes that were maybe not appropriately accounted for because no one really likes to deal with taxes like that," Rivard says. "And so, when you get there, you might find it's actually a negative hit to your ETR, but no cash, so maybe no one's too upset because at this point in time, it's all just financial accounting. I think what we've seen, especially in China, there's a lot of risk around cash taxes. So, you can actually have a significant impact to your cash flow if you're not looking at your tax profile correctly and you don't understand the risk around tax liabilities."
