Mergers and acquisitions create a plethora of moving pieces for financial leaders to juggle — including economic development incentives, although they’re frequently overlooked.
Such incentives can potentially offer millions of dollars to offset taxes, real estate costs, utility bills, and training expenses—plus free up cash to cover other deal expenses.
What are economic development incentives? Cities, counties, states, and utilities award them to companies to stimulate job creation and/or new investment in the community. The benefits take many forms: grants, tax abatements and credits, recruitment/training assistance, and infrastructure improvements.
The most recent high-profile example was Amazon’s search for a second headquarters location, for which 238 communities submitted proposals. Some offered eye-popping incentives; Newark, N.J. offered $7 billion!
M&A deals may present opportunities for the surviving company to build operational synergies that create economic value. Also, the company’s real estate portfolio can be influenced by incentive offers related to decisions on company locations. Further, incentives can offset costs for companies that might be considering consolidation, providing a reason to retain jobs and investment within a community.
But, particularly during a corporate transition, incentives can be complex to both obtain and retain. Here are five crucial considerations that CFOs should keep in mind to maximize this important resource:
Take inventory of existing incentive agreements before the merger or acquisition. Does the acquiring or target company already benefit from an incentive program? These benefits may be kept or expanded if the acquirer plans to expand in the same state or region. However, companies can also be hit with significant financial penalties, known as clawbacks, if commitments (some made years ago) are not fulfilled.
Before moving forward with an acquisition, be sure to take inventory of all existing incentive agreements and to understand the related ROI.
From there, be sure you address the terms with the entities that gave your company incentives early in the process. It is sometimes possible to renegotiate terms for incentives if a company can show economic disruption to its industry. And often, existing agreements can be reassigned to the successor entity after a merger.
Know that negotiations often involve multiple entities. Securing incentives can involve complex negotiation with multiple government entities, depending on regulatory guidelines. The process can take many months, and sometimes even years.
For example, after Newell Rubbermaid and Jarden Corp. merged into Newell Brands, the new entity negotiated incentives with two states and four cities. The company wound up winning $27 million in tax incentives over 10 years for its Hoboken, N.J., headquarters, and $3.23 million in grants and property tax abatements for an R&D facility in Kalamazoo, Mich.
Understand your baseline employment level. Incentives are often based on “baseline employment,” or the number of employees the firms have prior to the agreement. Only job growth above that mark will count toward incentive benefits.
That number can be difficult to ascertain during an M&A process, when some employees may be shifted to a new entity and others in duplicate roles may be laid off. And in some instances, downsizing could spur a future wave of growth that could be addressed in a separate, distinct project.
As such, there may be room for a company to negotiate the legally recognized baseline employment number to its advantage.
Carefully estimate job growth projections. Despite superior financial modeling, companies can’t always predict the future. Most incentive programs require companies to commit to creating a certain number of jobs over an extended term. Negotiators should account for the penalties of non-compliance, which can include a clawback of funds even years later.
Some incentive programs are structured to penalize missed targets, which would call for conservative estimates in areas like job growth. Other programs offer more margin for error. Be sure to understand how the program is structured when committing to job-creation numbers.
Be aware of optics. Incentive negotiations require careful deliberation between a company and public-sector officials. Although the company wants to maximize the benefit, keep in mind that the incentive package it receives will ultimately be made public. The company could be portrayed negatively in the media if it accepts generous incentives then proceeds to lay off staff.
Such fallout can be mitigated by being transparent with public-sector entities. A company should be prepared to communicate the benefits of its project beyond job numbers, including new capital investments, average salary growth, community support, and workforce training.
In closing, incentives offer huge cost offsets for companies engaged in a merger or acquisition, either before the transaction is completed or in its aftermath. Nonetheless, the devil is in the details. Being prepared puts the company in the best position to maximize its award and maintain the public’s goodwill.
Tracey Hyatt Bosman is a managing director at Biggins Lacy Shapiro & Co., a site selection and incentives advisory firm. It helps manage the complexities associated with finding optimal locations for new business ventures and securing incentives to support them.