Finsbury 21 Jan 2015 // 2:39PM GMT
Tax inversion deals are clearly the most talked about M&A deal structure we have seen for many years. Unlike other hot-topic M&A deal structures (think LBOs or activist investor campaigns), inversions involve a highly charged political controversy in the context of the global competitiveness of corporations and their home economies. Although the recent Treasury Department rules have significantly or, in some cases, fatally crimped the economics of some previously announced inversions, many tax advantages of inversions remain. As a result, the structure retains its appeal for a number of cross-border acquisitions by U.S. companies and will likely continue to create business and political headlines in the U.S. and abroad.
Depending on the friendly or hostile nature of the deal, the parties’ home countries and the constituencies being addressed, tax inversion can be a plus to be celebrated, a minus to be exploited or, all too often, a combination of both. The many facets of inversion deals and their shifting nature create far more complicated communications challenges than any other type of M&A deal structure.
For those who haven’t kept up with press coverage of the M&A world, a tax inversion structure is where a U.S. company buys a firm domiciled in another country with a lower corporate tax rate (say the U.K. or Ireland) and “relocates” the buyer’s tax home to that of the selling company. Moving the parent company to a lower tax rate country is not the sole purpose of most inversion deals, but the purpose of the “inversion” aspects of the structure is to lower the taxes the combined entity will pay going forward.
Inversion’s Highly Charged Political Aspect
The communications complexity of tax inversion is largely a result of its status as the highly politicized merger structure, particularly in the U.S., but to an extent in the other countries as well. A large number of U.S. politicians on both sides of the aisle have excoriated the structure, and the Obama administration seized on the issue after a succession of high-profile inversion deal announcements, deeming the companies “unpatriotic.” The proposed new Treasury rules, because of their dramatic appearance and highly technical application, have also further complicated the already complicated messaging for inversion transactions.
The communications strategy for any cross-border deal using (or perceived to have the opportunity to use) a tax inversion structure must prepare for and manage the intense media and political focus on the deal’s tax structure. Much of it will be quite negative, notwithstanding the other financial and economic merits of the transaction. Here are some of the key communications considerations for both pending and new inversion deals.
Managing Conflicting Interests of Deal Audiences
Tax inversion deals in the U.S. pose unusually complicated messaging challenges because of the different concerns of the stakeholders around the transaction. U.S. companies looking to invert find themselves in a “pick your poison” situation. A tax-motivated deal rationale may play well to shareholders, but holds the risk of intense criticism by well-known politicians who continue to publicly characterize these deals as unfair, “un-American” tax avoidance. Moreover, companies with important retail customer bases may find a tax inversion structure threatening to their business model because of the possibility that negative publicity surrounding the tax inversion will lead to customer disaffection. On the other hand, choosing not to invert in a cross-border deal where it is or perceived to be feasible can easily draw the wrath of investors, activists among them.
As a result, potential U.S. inverters need to ascertain the potential sentiment surrounding inversion across a large variety of audiences in advance of a deal. This should include use of survey and polling to inform the deal communications strategy and “damage assess” potential messaging to investors, customers, employees, politicians, etc. Companies should also prepare an effective public affairs campaign in advance of the announcement of an inversion deal, including identification of potential third party influencers to support use of an inversion structure. Companies should implement this type of advance planning from the very outset, well before unveiling their deal.
Understanding the “Tipping Point” On Shareholder Sentiment
Despite the many politicians and journalists criticizing inversions and casting aspersions on the patriotism of users of the structure, investors and the stock market in general seem to be quite favorable to tax inversion because of its obvious value creating aspects. This can be seen in the favorable share price reactions accorded inverters. According to Bloomberg data, out of 14 companies that announced or completed inversions since 2010, eight have outperformed the MSCI World Index. All but three have gained since announcing their transactions.
Whether the stock market’s support of inversions will continue unabated is not as simple a question as it first appears. For starters, as mentioned above, the proposed new Treasury regulations may render some inversions financially impractical or at least reduce their favorable economics. Also, the more negative the continuing reaction to inversion in the political community and various media outlets, the more possible a negative spillover effect in the financial community. This may be particularly true because there is a growing number of investors in the U.S. and Europe who factor “sustainability” concerns into their investment decision-making.
Preparing to Explain the “Go or No-Go Decision”
Because of the intense investor and financial press scrutiny of inversion transactions, there is simply no such thing as a routine cross-border deal announcement in situations where a U.S. company is acquiring a foreign firm. From the very first announcement (including responses to leaks) the inversion story needs to be thoughtfully explained, even if the story is that the parties are considering, but have not decided on an inversion, or that inversion is a by-product of the deal but not a deal driver or that the deal will not in fact use an inversion structure. Ironically, the last situation, while politically correct, may pose the greatest communications challenge because of the equity market’s strong assumption of the value of tax efficiencies for the combined company.
Communication Issues for Non-U.S. Inversion Targets
The communications challenges of tax inversion don’t end on the U.S. side of the deal. By definition, the to-be-acquired company will bring with it foreign audiences of investors, regulators, press, politicians and government. In contrast to a run-of-the-mill cross-border acquisition by a U.S. company, managing foreign communications may be complicated by the deal structure’s notoriety in the U.S. This could lead target company shareholders to worry about execution risks in the U.S. arising from the politicization of tax inversion or disaffection by the acquiring company’s shareholders because of the structure’s controversial nature. These concerns need to be recognized and dealt with in the acquirer’s strategic communications plan in a coordinated fashion with that of the target.
A hostile tax inversion deal presents still more complicated communications issues for the acquirer, as illustrated by Pfizer’s recent run at AstraZeneca. Not only will the acquirer have to run the familiar hostile deal gauntlet in the target’s home country, but it also will have to be on guard against the target launching a negative communications campaign in its home country as well as in the U.S. based on the political and popular hostility to tax inversion deals in the U.S. (Full disclosure—our firm Finsbury represented AstraZeneca).
The past year’s inversion deals reflect the need for the acquirer’s communications strategy to focus on presenting an accurate and balanced explanation of the rationales for the deal. Over- or under-emphasizing the tax inversion aspect will not serve the acquirer’s goals in the long term. The key is separating the inversion from the overall messages around strategic rationale so that the long term benefits receive more “air time.” If the tax-saving aspects of inversion are a principal deal driver, it is important for the market to so understand. If, on the other hand, inversion is not the principal driver, or is even virtually irrelevant, it is important for the acquirer to get this message across and to make it central to its communications strategy.
Inversions may slow as a result of the new tax regulations, but they will remain a viable, if frequently misunderstood, deal structure. More of these deals are expected over the coming months, and, in all likelihood, the next set of large inversion deals will be immediately labeled as the first to launch since the new Treasury regulatory regime. Participants in inversion deal planning will need to develop well in advance of announcement a carefully planned strategic communications approach that recognizes and deals with the multitude of constituencies that will almost certainly be involved on both the acquirer’s and the target’s side.
Kal Goldberg is a Partner and Charles Nathan is a Senior Advisor at Finsbury