Global merger and acquisition activity set an all-time high last year, breaking the previous record set in 2007. According to an EY survey in October 2015, 59% of executives planned to actively pursue acquisitions in the coming 12 months. Given that this number is significantly higher than the 40% reported in the survey a year ago, we very well could see another record-breaking year for M&A in 2016.
But institutional investors are not nearly as convinced as the executives about the merits of acquisitions. Buy-side analysts and portfolio managers are often skeptical about M&A as a strategic alternative for driving growth, because they believe no corporate event has greater potential for failure than a major deal.
Plan for Success
How to improve the odds for M&A success? The obvious answer - essential in any strategic initiative - is careful planning. Unfortunately, mergers and acquisitions often develop so rapidly that time for preparation is limited. This is why one of the mainstays of investor relations is an ongoing program of skillful relationship building with a company's key stakeholders. Management teams that stay in touch with their priority constituencies, including institutional shareholders, will be in a better position to understand, in advance, the different mindsets these interests will bring to an impending deal.
In addition to keeping your shareholders updated on company developments, management should obtain feedback from your top 25 shareholders on issues that matter. How do your institutional holders feel about M&A as an element in your company's growth strategy? Are they more concerned about dilution or debt? Do they require all deals to be immediately accretive? How does their thinking about industry consolidation align with yours? Do they have concerns about your management team's M&A experience? A comprehensive third-party perception audit of your investor base can help answer these questions.
Develop Your Strategy
Armed with this insight, the company can develop an effective M&A messaging strategy. From the announcement of a deal through the closing, this strategy should be aimed at two outcomes. The first is to support successful completion of the deal. The second is to ensure that, whether the deal goes through or not, your company will emerge from the process with even stronger positioning on Wall Street.
Messaging based on an understanding of your shareholders' perceptions and concerns can convert them into advocates for the deal. Current shareholders will want to know how the transaction benefits them. Assess the transaction through their eyes, particularly when dilution is involved. Whether a deal is strategic or tactical is often crucial in determining how much dilution Wall Street will support. Are you acquiring the target for its products, its technology platform, its customers or the geography of its operations? An explanation of expected synergies and long-term benefits can help offset dilution concerns.
Sound planning for M&A communications always considers "what if" scenarios. Chief among them: What if the deal fails to close? It is imperative to communicate that, as attractive as the deal may be, it is by no means your company's sole option for achieving its long-term goals.
Successful M&A messaging also must reflect the perceptions of stakeholders on the other side of the deal. (Value is in the eyes of the beholder.) Both companies will emphasize that they are getting the best possible price, but they may come from opposite directions in the reasoning and messaging. Your success in M&A communications can hinge on the ability to mediate the contradictory nature of the messaging on opposite sides of the transaction.
Negotiate the Outcome
It often can take as much diplomacy to coordinate messaging strategy as to reach agreement on deal terms. The best M&A communication outcomes result from both parties clearly understanding their respective roles, as well as their IR messaging objectives. Coordinated planning also is crucial. It is imperative for each company to be systematic in maintaining open communications with its institutional shareholders – and to get in touch with these constituents immediately after the transaction is announced.
Overnight, the management teams on both sides of the deal will find themselves encountering new universes of shareholders, often with very different investment objectives and horizons. As closing approaches, the acquiring company should become thoroughly familiar with the target's shareholder base and be prepared for the necessary outreach once the deal is complete. This should include personal phone calls to welcome inherited shareholders or outgoing e-mails with IR contact information. These actions engender goodwill and can make a lasting positive impression.
Cultivate Broad Support
Although CFOs and investor relations officers tend to bear the primary responsibility for spearheading M&A communications, the scope of the effort must extend beyond these functions. Senior management should assemble an internal task force that also consists of the legal department, corporate communications, HR and the business unit where the acquisition will reside. Working together, these groups can cover the entire range of external and internal constituencies.
Too often, communications with non-financial stakeholders get short shrift from management during the frenzy of activity surrounding a deal. Employees will be asking: Will I have a job? What will happen to my pay and benefits? What are the implications for my career, my lifestyle and my security? Customers and suppliers will have their own sets of questions about the transaction and its potential impact on their business relationships with both companies involved.
Coordinate the Details
In addition to crafting messages that respond to these questions, a number of logistical communications issues will need to be addressed. For example, will both companies conduct a joint conference call when announcing the transaction? If so, which members of the executive teams will participate in the call? If each company is conducting its own conference call, answers to potential analyst and media questions should be carefully scripted and rehearsed to ensure consistency.
If the current trend is any indication, M&A communications will be an important tool this year for companies and their executive teams. Communicating effectively before and throughout the M&A process will enhance relationships with all constituencies and possibly even enable a more successful transaction.
Maureen Wolff is president and partner at Sharon Merrill. She is a National Investor Relations Institute Fellow, Senior Roundtable Member and Honorary NIRI Boston Director. She is a trusted advisor to CEOs, CFOs and boards of directors on critical communications issues including corporate governance, shareholder activism and proxy contests, CEO succession planning and disclosure issues.
For more information on Sharon Merrill Associates, please contact us at info@InvestorRelations.com, or at 617-542-5300.