Is Your Tax Shelter Actually a Money Pit?
Beware the shiny tax-inversion toy. Merger integration is hard enough to pull off under normal circumstances. The additional dangers of tax inversions range from masking a weak business case in pursuit of tax breaks to incurring reputational risk to investor backlash. The tax advantages may also not be as substantial upon further consideration of international tax law.
To mitigate the risk of “Taxopia,” Boards and their management teams should look very carefully before they leap. Here are five questions Boards can ask while considering a tax inversion acquisition:
1. Apart from the tax break, where's the beef?
Especially for tax inversions, the strategic value should be crystal clear. Tax savings is not a compelling rationale for leaders to put in the hard work that a successful acquisition requires. Remember that the Damler/Chrysler and AOL/Time Warner business cases sounded good at the time.
2. What is the reputational and/or brand risk to the company?
Will the criticism from investors, analysts, and ultimately customers erode value that exceeds the tax break advantage? Walgreens decided not to use their purchase of the remaining stake in Europe-based Alliance Boots to domicile in Europe. They wisely considered the downstream impact on corporate reputation and backed off.
3. What is the regulatory and political risk?
Certainly the Obama administration is responding to the tax inversion wave, and inversions are a trigger event for political debate and accusations of national abandonment. Mixed with reputational risk, political risk can be a powerful negative cocktail.
4. How will the management team beat the odds against success in M&A?
Frankly, it is much easier to legally re-domicile and gain a tax break than it is to navigate the organizational and leadership issues of the combination. It's important for the Board to understand the extent to which the management team is up to the task.
This question is so important since 50-70% of acquisitions fail to meet stated financial and business goals under traditional acquisition circumstances, let alone a tax inversion scenario. Board and management should have frank, candid dialogue about the integration risks to people, culture and organizational functioning. These are the well-known integration killers that, if left unaddressed, will easily negate any ROI generated by the tax break itself.
5. How credible and balanced are management’s motivations for this deal?
This somewhat ugly last question is something the Board can discuss among themselves, separate from management. A combination of hubris, egotism and avoidance by company leadership has spelled doom in many a high profile acquisition. Pfizer's pursuit of AstraZeneca and the failed Omnicom/Publicis merger weren't thwarted by lack of strategic rationale. They fell apart because of leadership miscues and cultural mismatches.