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Telecom Experts Evaluate Effects of Regulatory Noncompliance on M&A

Compliance

Josh LongCHANNEL PARTNERS EVOLUTION — In the telecommunications industry, regulatory compliance – including the payment of taxes in thousands of different jurisdictions – may be for geeks, but taking such matters nonchalantly can result in grave consequences for carriers, resellers and other telecom professionals.

Just ask Ray Hernandez, managing director of telecom and technology with W.G. Nielsen & Co., a Denver-based investment banking firm specializing in mergers and acquisitions.  Speaking Monday during Channel Partners Evolution, Hernandez described a transaction that he was involved in that looked good on paper.

While the buyer wanted to purchase the business because it had good economics, there was a problem: The seller was encumbered with state and federal tax liabilities, Hernandez explained during a VIP session, “Don’t Let Regulatory Noncompliance Scuttle Valuation and Growth.” The buyer had an institutional investor who wanted to settle the regulatory issues before closing on the agreement; however, the seller wanted to negotiate with the taxing authorities after the closing.

The deal ultimately collapsed.

“Keep your current liabilities current,” Hernandez advised. “Don’t wait until the last minute.”

The story underscores the importance of a proactive approach to regulatory compliance. Deal with the tax issues now rather than during an audit or pending transaction, counseled Brent Reeves, vice president of business development for CCH SureTax, a provider of telecom taxation solutions.

Matt LaHood is in agreement. The worst time to address taxation issues “is when you’re under the gun,” noted LaHood, the CEO of General Solutions Associates, LLC (GSA), a telecom consulting services and solutions provider that sponsored the session along with Covoda Communications, Inc.

On a related note, companies that intend to sell or merge with another organization should consider that buyers will be doing their due diligence to thoroughly investigate the seller’s financials and other information. Such due diligence could reveal disquieting facts for a potential buyer, such as a delinquent tax liability, which may result in a lower sale price for the seller or kill the deal entirely. For example, GSA has worked with companies that haven’t even registered to be a recognized entity in a state, LaHood noted. What’s more, in a significant number of transactions, companies learn after a sale that the Federal Communications Commission has not authorized the transfer, he noted.

“What did they buy?” LaHood asked. “They bought nothing.”

LaHood also noted he has been in meetings with large carriers in which they claimed …

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… they didn’t have to pay taxes. However, a reseller of the carrier’s service is at risk if that carrier gets audited, he observed.

Outsourcing issues of regulatory compliance and taxation to the likes of GSA and CCH SureTax can free up resellers and other telecom professionals to focus on their core business. That’s one of the benefits described by Mark Suto of Covoda Communications. He explained that regulatory compliance issues were eating up a lot of his time, and he was worried whether he was doing things correctly.

Finally, in a U.S. market presently characterized by increased M&A activity, Hernandez emphasized the importance of audited financials. Buyers want to know that a seller has accurate and detailed books and records, he said, including such granular information as the months left on a customer’s contract and the monthly gross margin related to that customer.

Explained Hernandez: “It adds credibility, trust, and again … it’s an indication of what kind of business person you are.”


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