The Beat Goes On …

The beat goes on … the drums keep pounding rhythms to the brain …
Sonny & Cher, 1967

Yes, the M&A beat goes on.  Worldwide M&A activity totaled $4 trillion in 2018, up 19% versus 2017.  And, with more than three-quarters of corporate and private equity executives anticipating the pace of M&A to accelerate in 2019[i], the M&A drums keep pounding rhythms to the brain.

M&A is exciting.  Almost instantly it seems the company becomes bigger with access to new customers, products, brands, services and markets.  Increased industry dominance can produce opportunities to gain scale, leverage efficiencies and create synergies.  No wonder many bankers, reporters and investors seem to egg-on the process.

However, too often M&A deals don’t reach their full potential.  Sometimes merger objectives aren’t well-thought out, are too narrow in focus or don’t anticipate industry/market changes.  Sometimes integration efforts fall short or cultures don’t mesh.  Sometimes underlying business issues aren’t identified until after close.  So not surprisingly, not everyone is thrilled with M&A.

When M&A is successful, its typically because the acquiring/surviving company recognizes the beat goes on.  In other words, both the buyer and target companies know themselves and bring business competencies that complement and expand upon each other’s capabilities and opportunities. Further, throughout the diligence process (not just during the deal stage), the strategic vision for the union is continuously validated.  Importantly, there’s an ongoing effort to develop, refine and execute an integration plan that balances driving organic growth with achieving cost-cutting synergies.

Given the robust interest in M&A, investors will inevitably ask about M&A strategy. Investor Relations should be prepared to respond while keeping the sound of the beating drums to a dull roar.  Often this means repeatably articulating the company’s broader growth strategy and how M&A may (or may not) fit into that.

To that end, companies should have a M&A framework to provide organizational focus and discipline.  Such a framework should be grounded in strategy and consider questions like:  What are the risks and opportunities of growth via acquisition versus organic growth? What are our strengths and weaknesses and how does an acquisition/divesture address such? What options are most viable in view of our current situation and desired strategic direction?

When the hypothetical becomes real and a deal is announced, Investor Relations should be cognizant of disclosure limitations and work to ensure internal and external messages are aligned.  At best, everything is preliminary until close so when it comes to setting expectations “less is more” should be your mantra.  This is particularly important because not everything gets revealed during the due diligence process and confidentiality agreements may limit what is discoverable until after close.

During this time, think about what your investors will most want to know, what metrics and milestones will be most important for measuring integration progress and merger success, how you will breakout the reporting of same and how your guidance practices will or should change.  Inasmuch as deal structure or size may impact the company’s financial flexibility and go-forward growth strategy, consider how your investor base may change.  For the next 1 – 2 years, your answers to these questions will serve as a roadmap for managing this change because, of course, the beat goes on.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

[i] Deloitte, The state of the deal – M&A trends 2019

Loose Lips, Part II

Sometimes, I just don’t get it.  I’ve gone through compliance training multiple times; so have friends and colleagues.  It’s ubiquitous at public companies and is designed to educate employees, officers and the board about the company’s code of conduct, which, of course, everyone should also read.

Corporate codes of conduct encompass the legal guidelines and standards of ethical behavior expected of employees, officers and the board, and covers topics like workplace discrimination and harassment; corrupt practices; conflicts of interest; protecting confidential information and insider trading.

So, I was flabbergasted on the news that New York Congressman Chris Collins was indicted on insider trading charges.  This has absolutely nothing to do with politics, but everything do with a breach of his fiduciary responsibility to the company, his fellow directors and the company’s shareholders.

Congressman Collins sits on the board of Innate Immunotherapeutics.  This company’s code of conduct outlines its expectations about disclosure and use of information as well as insider trading. Regarding disclosure and use of information, Innate’s code of conduct states confidential information should not be used in a way which creates a personal benefit or benefits another party not entitled to make use of such information.  It further states confidential information should be kept confidential, and to ask if there is any doubt about what information is considered confidential.

Regarding insider trading, Innate’s code of conduct reminds that it’s a criminal offence to trade company shares while in possession of inside information, which is defined as information not yet publicly available but is expected to have a material effect on the company’s stock price.  The code of conduct then says this trading prohibition applies not only to employees, officers and directors but anyone else – including family and friends – who is given access to inside information.

This is pretty standard stuff.  It places no undue burden on, nor has unrealistic expectations of directors, officers or employees.  Further, the expectations outlined helps ensures those who follow it do not violate Rule 10b-5 of the SEC Act of 1934, which prohibits insider trading.

Yet, the Congressman’s loose lips tipped his son about a failed clinical drug trial before the news became public.  While the Congressman did not trade on this information, his son did and tipped his fiancé’s family, who also traded on the information.  As a director, he should have known better and should not have put his own family in such a position.

Some say insider trading is a victimless crime. That trading is essentially an exchange of information, so the very act of buying or selling is putting information (regardless of source) into the market, enhancing market efficiency.  When all trades are accompanied by a simultaneous news flash of who is trading and why, then I can accept that argument.

Insider trading is a breach of a director’s fiduciary responsibility to shareholders to keep confidential information confidential.  It’s a violation of the law, a company’s code of conduct and the trust of the company’s officers, employees and other directors.  In my view, it’s also crime against trust and the sense of fair play I believe necessary for the effective functioning of the financial markets.

Lisa Ciota
President/Founder
Lead-IR Advisors, Inc.

Join NIRI-Chicago at its annual Investor Relations Workshop – September 28, 2018Print

Sources:
Frenkel, J. (2018, August 8). Insider Trading Charges Against Rep. Collins Reminiscent Of Martha Stewart Conviction. Forbes.
Frenkel, J. (2018, August 13). Collins’ Protestations of Innocence Defy Meritorious Insider Trading Laws. Forbes.