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
Lead-IR Advisors, Inc.

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

Tying Knots

When organic growth just won’t do, M&A to the rescue.

No, this isn’t an ancient Chinese proverb, it’s a common growth strategy for businesses in competitive and/or low-growth industries.  Indeed, sometimes the fastest path to growth is via acquisition and it seems we’re seeing more of it. Global M&A is off to one of its strongest starts ever with transactions totaling $1.2 trillion in value in first quarter 2018, building off a similarly strong fourth quarter 2017.

Like marriages, acquisitions don’t always work out.  But those that do are those where the buying and target companies know themselves and each has something to offer the other.  In other words, success rates improve when buyers have a thematic M&A approach that aligns around specific objectives and the business competencies of both parties; the buyer and target validate strategic visions throughout the due diligence process (not just during the deal stage); and buyer and target continuously develop, revise and refine the integration plan and objectives to optimize synergies.

The deal-making process is exciting, and it can sometimes be easy for those involved to get ahead of themselves.  So, while Investor Relations isn’t usually on the frontlines of the merger process, it needs to be involved to represent the investor perspective and serve as a patient, long-term focused voice during the knot‑tying process.

Investor Relations needs to be cognizant of disclosure limitations; align internal and external messaging; and help ensure expectations are realistic.  To that end, Investor Relations should ask some knotty questions including:

QuestionWhat don’t we know? What won’t be – or wasn’t – revealed during the due diligence process? For example, is access to customer data or customer contracts limited due to confidentiality agreements or regulatory or anti-trust concerns.

DollarWhat’s the real total cost?  Its more than just the purchase price. There’s also a cost to the equity or debt used to finance the acquisition.  Other costs may include severance packages, legal and banker fees, target company pension obligations and equity compensation.   All these can affect total costs and the acquisition’s expected return.

safeHow do we protect our own information?  Often confidentiality agreements are one-sided:  buyer agrees to keep target’s information confidential but not the reverse.  Yet, throughout the process the buyer may share confidential information with target that could put buyer at risk if the deal falls through or someone else swoops in and acquires the target.

Slash signWhat can’t we do?  Are there any restrictions between deal and close?  What about after close?  Are you limited from pursuing other acquisitions, raising additional debt, paying dividends, repurchasing stock or taking other strategic actions?

No wonder the phrase “less is more” is so relevant during M&A.  These questions raise important considerations in how to talk about a merger.  Yet, you can almost never say nothing, so a careful calibration of what to say and when is needed throughout the process.

Lisa Ciota
Lead-IR Advisors, Inc.

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