Archive for the ‘Disclosure & valuation’ Category

Mind the GAAP – and the perceptions

August 1, 2016

London, United Kingdom - October 30, 2013: Detail in the Metro with train in station. The door are open in on person is written "Mind the Gap". Inside the train is strong light and door on other side is closed. On right is woman, passenger sleeping in train.

One of many fond impressions London offers to visitors is the warning “Mind the gap” – a uniquely British way of cautioning subway riders not to trip over, or get their foot stuck in, that space between platform and railcar. Very polite and considerate. A stumble could be nasty.

The gap investor relations people must mind – pardon the pun – is the difference between earnings under Generally Accepted Accounting Principles and the measures that CEOs, as well as some investors, prefer for assessing the performance of businesses. The EBITDAs and Adjusted-Whatevers are so many and varied that investors and IR professionals must watch our footing.

A good primer on the issues is provided in “Where Financial Reporting Still Falls Short” in the July-August issue of Harvard Business Review. A couple of accounting profs look at GAAP and the gaps in terms of what investors should look out for, and to some extent what policy wonks might try to regulate next. For accounting is also all about regulation.

Issues they cover are disclosure matters that IR people need to “get”:

  • Universal standards, with GAAP and IFRS converging (or not)
  • Revenue recognition, especially for complicated products or services
  • Unofficial earnings measures, Adjusted-How-We-Look-At-Our-EPS
  • Fair value accounting vs. what you paid for an asset
  • Cooking the decisions, not the books

The writers call this last item “the more insidious – and perhaps more destructive – practice of manipulating not the numbers in financial reports but the operating decisions that affect those numbers in an effort to achieve short-term results.” So a CEO (or other execs) seeing indications of a revenue shortfall will cut prices to move more product before quarter-end, or to save earnings will delay a discretionary cost like an R&D project or ad buy. Voila! Suddenly EPS meets expectations.

I’m not sure that’s new, or always insidious. When you judge people by numbers, they strive to hit the numbers – teachers teach to the test, sales people sell what they have incentives to sell, and CEOs try to hit their numbers. If the market wants to encourage long-term thinking, boards and perhaps investors can start judging CEOs by the change in performance over years, not quarters. Short-termism is an issue. But I am skeptical of policy makers (or accounting profs) tinkering with regulations to alter how executives make decisions.

The perceptions behind this article are more concerning: Investors don’t trust, with good reason or not depending on the company, disclosures they receive. GAAP or non-GAAP, trust is absolutely critical. Perceptions matter.

What can investor relations people do about this gap?

  1. Understand our own companies’ GAAP and non-GAAP metrics, not just to provide the mandated reconciliations but to be able to work through the numbers and clearly explain the rationale.
  2. Ask investors what they like (or don’t) about our financial reporting.
  3. Benchmark peer companies for insightful metrics and best practices.
  4. Challenge our managements if metrics are confusing or misleading.
  5. Be an advocate for simplicity and clarity.

Being transparent means giving information that enables investors to see what’s going on in the business. That doesn’t just mean more pages of accounting boilerplate and reconciliation tables. Perspective is one of the greatest values IR people can give investors.

© 2016 Johnson Strategic Communications Inc.

What’s material? It depends …

November 3, 2015

Materiality is one of those fuzzy ideas. Is it a piece of information that makes your stock price move (or would if disclosed)? A change that impacts sales or profit by 10% … or 5 … or 1? One of those events requiring an 8-K filing? Is anything investors want to know material?

Early in my career in investor relations, I learned that accountants can be surprisingly philosophical – arguing vehemently when gathered around a table for late-night discussion of a draft. The same is true of lawyers. And I suppose IROs can disagree on such issues, too.

The Wall Street Journal offered up a couple of explorations this week:

In “Definition of Materiality Depends Who You Ask” on Nov. 3, the quicker read, a WSJ blogger quotes five different definitions of materiality – such as they are – and notes that they are in flux.

In “Firms, Regulators Try to Sort Out What’s Worth Disclosing to Investors” on Nov. 2, the paper focuses on potential shifts in regulatory views – and pushback from companies against overlegislation.

This debate is perennial, and probably unresolvable. But a refreshing aspect is the new interest in whether companies are disclosing too much detail that has nothing to do with investors making decisions – and by its sheer volume may obscure what the real issues are.

Honeywell International Inc., the paper notes, is pursuing on a “disclosure simplification” project to enhance the quality of reporting. In October, Honeywell and its CPAs met with the SEC staff – and the agency filed a short Honeywell slide deck outlining key themes:

  • Eliminate duplicative and immaterial disclosures
  • Customize disclosures to Honeywell
  • Streamline footnotes to address information overload
  • Assess the relevance of recurring disclosures
  • Challenge boilerplate language typically included in company filings
  • Use of cross references

Hmmm … novel ideas. Reducing repetition, making footnotes digestible, taking a red pen to boilerplate and questioning verbiage that’s been in the 10-K so long no one can remember why. This will be interesting.

And what do you think “material” means?

© 2015 Johnson Strategic Communications Inc.

What a week, eh?

May 25, 2012

The week leading up to our long weekend in the U.S. gave investor relations people plenty of reasons to pause and consider what our profession is about:

Facebook faced issues with its IPO – including a brouhaha over the analysts for Morgan Stanley and three other underwriters lowering their estimates in the middle of FB’s road show. Some commentators call for SEC regulations to require investment banks running IPOs to disclose their analysts’ opinions broadly, not just to their favorite institutional investors. Something about a level playing field.

Reuters says Facebook told the analysts they’d better bring down their revenue and earnings forecasts, a wink-and-nod sort of investor relations not regarded as acceptable in recent years. Something about Regulation FD.

People care because the IPO lost its sizzle on the very first day, then dropped further. FB shares closed this week 16% below the IPO price. The Financial Times has a good narrative. Poor Wall Street. Poor Mark Zuckerberg. Poor speculators.

The hounds of the plaintiffs’ bar are in full chase, of course, barking loudly and threatening in all directions. The SEC and Congress are investigating. As a high-impact disclosure issue, this will be one to watch.

JPMorgan Chase continued to convulse over its trading loss of $2 billion, or is it $3 billion, or … whatever the amount, reputational damage exceeds the financial loss.

From an IR perspective, at least two aspects of JPM’s debacle are interesting:

  • The disclosure (or lack of disclosure) of the risks JPMorgan and its “London whale” were taking – and the losses they incurred. IR people should take a close look and consider how we would treat similar setbacks in our companies.
  • Corporate governance concerns came to a boil over doubts about the JPM board’s risk-policy committee and whether it had the right stuff to actually oversee risk for what is, basically, a huge global risk-taking machine.

Washington stalwarts, once again, are calling for new laws and regulations to codify the good sense that the old laws and regulations haven’t quite brought about. And we’ll be treated to the spectacle soon of Jamie Dimon going before Congressional panels to be used as a prop for politicians’ campaign videos. Oh, well.

General Motors filed an amendment to its proxy statement today noting that it “recently learned” of a related party transaction last year that it hadn’t disclosed.

GM says CFO Dan Ammann’s wife is a partner and COO of an advertising agency that got about $600,000 from a GM subsidiary in 2011 – and he didn’t know about it, so it wasn’t in the proxy. The deal was reported in AdWeek last fall, according to the Detroit Free Press, but apparently the $600K eluded the proxy writers. Oops.

Executive compensation remains a lightning-rod issue, especially in an election year. Plenty of misinformation is floating around, including this misleading headline from Associated Press: “Typical CEO made $9.6 million last year, AP study finds.”

You have to read way down into the story to find that AP’s sample included only S&P 500 companies, the largest cap companies in the U.S. market. Actually, AP had data from only 322 that had filed proxy statements through April 30. The other 7,000-plus publicly listed companies in the United States? Not part of the study.

None of my clients’ CEOs has $9.6 million in compensation. How about your boss or clients? But the AP headline paints with a very broad brush: “Typical CEOs …”

The AP headline might have said: “Large-cap CEOs made $9.6 million …” As it is, politicians trading on Joe Sixpack’s envy will just run with the anti-CEO broadside.

And companies will deal with the widespread assumption that CEOs and other execs are paid too much. Investor relations pros need to focus on providing the real numbers and explaining – in plain English, not legalese – why pay is what it is.

What do you think?

© 2012 Johnson Strategic Communications Inc.

REIT disclosures help broader market

October 25, 2010

Most investor relations people are champions of disclosure – believers in the value of transparency for shareholders, as well as investors who might buy our stocks.

Now an article on the 50th anniversary of Real Estate Investment Trusts in National Real Estate Investor says the entire market – private and public – has gained from the emergence of publicly traded REITs and reliable financial data:

Thanks to Wall Street and a wave of IPOs [in the 1990s], modern REITs have not only provided liquidity to the commercial real estate industry, they have also upped the level of sophistication of financial reporting.

Ralph Block, a REIT investor and author of The Essential REIT, says the data in public disclosure makes a big difference from real estate investing years ago:

There has been an absolute revolution in disclosure and that’s true for most public companies. There is a lot more information available about not only the company, but also the properties.

Adam Markman, managing director of the independent real estate research firm Green Street Advisors, adds:

We think that the amount of information you can pull out of these publicly traded companies is helpful for the whole industry.

The benefit of “comps,” or comparative data on asset values and returns, probably carries over in many industries beyond real estate. Private equity investors and investment bankers often look to SEC filings of the public companies in a sector, as well as private information, to evaluate deals or valuations of companies.

The real estate industry also benefits from an education-minded trade group, the National Association of Real Estate Investment Trusts (NAREIT), that collects a wealth of data on real estate assets and returns – and puts the numbers out there on its website for investors (public or private) to track and use. Many trade groups keep data they gather close to the vest – to the detriment of their industries.

Of course, REITs haven’t had an easy go of it during the recent global meltdown-collapse-crisis-whatever-alarmist-name-you-want-to-call-it. For a typical REIT investor, these stocks are all about dividends – and generating the earnings or funds from operations to keep those dividends flowing is a challenge these days.

Referring to the three dividend cuts by mall owner CBL & Associates, REIT analyst Christopher Lucas of Robert W. Baird & Co., says:

That was a significant hit to the individual investor’s trust in the vehicle and in the operations, and it’s going to take some time to earn that trust back. … Now they have to rebuild the trust that investors placed in them to manage their balance sheet and their dividend much more consistently.

Managing performance to rebuild trust, of course, is what many companies in all industries are seeking to do as the economy bounces along in what seems to be an extended trough. Robust disclosure of results will aid in winning back that trust.

© 2010 Johnson Strategic Communications Inc.

While we’re thinking about taxes

April 16, 2010

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

Disclosing ObamaCare’s impact

March 29, 2010

Now is the time (if it wasn’t weeks ago) for investor relations people to get on top of the question: What impact will President Obama’s healthcare overhaul have on our companies?

The ObamaCare question will be asked in first-quarter conference calls and one-on-one conversations, and companies ought to disclose the material impacts either before first-quarter earnings or in their normal reporting.

Already the disclosures have begun to emerge after the president’s March 23 signing of the new government framework for health insurance. For example:

  • AT&T said Friday it will take a $1 billion noncash charge  when it reports first-quarter earnings. In a brief 8-K, the phone company  said the charge reflects loss of a tax benefit for subsidizing retiree healthcare costs. AT&T also said it will review its health benefits in light of the new law and the added tax burden.
  • 3M issued a news release and filed with the SEC on Friday, saying it expects an after-tax charge of $85 to $90 million, about 12 cents a share, when it reports first-quarter results. 3M did a more thorough job of explaining: ObamaCare eliminates a tax benefit for company payments that subsidize retiree prescription drug coverage. Under the new law, the extra tax bite doesn’t hit until 2013, but the change reduces the value of a deferred tax benefit on 3M’s books, so GAAP requires a charge now.
  • Caterpillar filed an 8-K estimating its tax hit at approximately $100 million, again to be recognized in Q1. Deere & Co. estimated its charge at $150 million, AK Steel at $31 million … and we can expect many more.

These filings with the SEC are not about politics, but bookkeeping, of course. Just another development that may require an 8-K and explanation in the next 10-Q. But editorial writers were quick to seize on the announcements as an “I told you so” moment on ObamaCare (The Wall Street Journal here, Investors Business Daily here). And now Congress wants to call these evil companies on the carpet for – the horror – disclosing the cost of the new healthcare law in a timely manner.

Update: The American Benefits Council, speaking for 300 large employers, on Monday called for repeal of the tax increase related to retiree prescription benefits. White House response: Buzz off.

Without wading further into the swamps of Washington, let’s just pay attention to our own duty as investor relations people: Each of us should be asking internally – if we haven’t already – what impact the health overhaul law will have. And how we need to disclose that, either now or with our upcoming quarterly results.

In a broader way, investors will be looking to companies in the biopharma, medical equipment, hospital and other health industries to provide analysis and forward-looking perspective on how ObamaCare will help (or hurt) future results.

© 2010 Johnson Strategic Communications Inc.

Selling a pig in a poke

February 22, 2010

For starters, “a pig in a poke” is an ancient expression referring to a scam in the Middle Ages. The trickster would go to the market with a bag tied at the top – inside was an active, wriggling animal that the seller promoted as a small pig. The hapless farmer who bought this bag would later discover what it contained – not a valuable pig to provide future meat, but a cat, comparatively worthless in a world with too many cats already. You could buy a pig in a poke, or sell one. Later, someone inevitably would let the cat out of the bag and the truth would be known.

And so we come to Bank of America‘s merger with Merrill Lynch, announced at the worst point of the financial crisis in September 2008 and closed on Jan. 1, 2009. The deal is back in the news today, and the conflict is over what BofA disclosed about what was inside that bag back in the fourth quarter of 2008.

A federal judge in New York today said he would approve a settlement between BofA and the SEC over lack of adequate disclosure in the bank’s merger with Merrill – but the judge called the consent order “half-baked justice at best.”

The slap was directed mostly at the SEC for not punishing BofA more harshly, but US District Judge Jed S. Rakoff also had a few choice comments on the company’s disclosure around the deal. I gather from news reports that Rakoff can be a little cranky – but in reacting angrily against “too big to fail” banks and the government that bailed them out, he is echoing the feelings of Main Street America.

As an investor relations counselor rather than a lawyer, I find the lessons on disclosure – and IR decision making when “selling” a deal – more interesting than the fine legal points of who’s right or wrong between the SEC and BofA.

In his opinion today, Judge Rakoff said the bank failed to make adequate disclosures following the September 2008 merger announcement, running through the proxy statement leading up to Dec. 5, 2008, approval by BofA shareholders, and right on through the Jan. 1, 2009, closing.

Rakoff cited two basic decisions not to disclose:

  • The choice not to disclose in the proxy statement on the merger than BofA was allowing Merrill to pay $5.8 billion in bonuses to execs and top employees “at a time when Merrill was suffering huge losses.”
  • The failure to tell shareholders, before either the vote or the closing, about “the Bank’s ever-increasing knowledge that Merrill was suffering historically great losses during the fourth quarter of 2008 (ultimately amounting to a net loss of $15.3 billion, the largest quarterly loss in the firm’s history).”

By not disclosing these flaws, some folks – obviously including the judge – think BofA sold its own shareholders a pig in a poke. Judge Rakoff’s take on it:

Despite the Bank’s somewhat coy refusal to concede the materiality of these nondisclosures, it seems obvious that a prudent Bank shareholder, if informed of the aforementioned facts, would have thought twice about approving the merger or might have sought its renegotiation.

What is far from obvious, however, is why these nondisclosures occurred. The S.E.C. and the Bank have consistently taken the position that it was, at worst, the product of negligence on the part of the Bank, its relevant executives, and its lawyers (inside and outside), who made the decisions (such as they were) to non-disclose on a piecemeal basis in which inadequate data coupled with rather narrow parsing of the disclosure issues combined to obscure the combined impact of the information being withheld.

The consent order includes several “remedial actions” – including requirements that BofA get SEC approval for its choice of independent auditors, disclosure lawyers and compensation consultants for the next three years. Judge Rakoff describes these as mild corrections for a BofA attitude in need of adjustment:

Given that the apparent working assumption of the Bank’s decision-makers and lawyers involved in the underlying events at issue here was not to disclose information if a rationale could be found for not doing so, the proposed remedial steps should help foster a healthier attitude of “when in doubt, disclose.”

On the money side of today’s ruling, Rakoff wrote that the $150 million BofA will pay the SEC is “paltry” but added the settlement is better than a “vacuous” proposal of $33 million he rejected last August. The judge reluctantly approved the 150 mil.

“While better than nothing, this is half-baked justice at best,” the judge wrote. In the spirit of giving partial compensation to the “victims,” Rakoff ordered that the $150 million be distributed to “legacy” shareholders of BofA, not officers and directors and not former Merrill shareholders who got BofA shares.

While not judging what took place behind closed doors leading up to the BofA-Merrill merger, I do think IR people can take two lessons to heart: Don’t sell a pig in a poke and, following Rakoff’s advice, When in doubt, disclose.

© 2010 Johnson Strategic Communications Inc.

Warren Buffett reads annual reports

December 12, 2009

This weekend’s Wall Street Journal has a readable piece on what Warren Buffett didn’t invest in during the financial and economic crisis (“In Year of Living Dangerously, Buffett Looked ‘Into the Abyss'”) … Bear Stearns, Lehman Brothers, AIG, Wachovia, Freddie Mac and others.

Besides making the point that deciding not to invest can be as important to a portfolio manager as pulling the trigger to buy, the story contains this nugget of side interest to those of us who labor in investor relations:

That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman’s annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn’t bite. Six months later, Lehman filed for bankruptcy protection.

So Buffett reads annual reports. Oh, I know, he’s a seventy-something sage, and many of us get most of our information online or on our phones. But Buffett is an investor with influence over market-moving sums of money. And apparently he digs into financial reports, marks them up and then makes his decisions.

Not that a nice annual report would have saved Lehman or AIG. But in the normal course of investing, quality of disclosure and clarity of explanation do matter.

Two bottom lines (at least)

September 21, 2009

DollarSignGreenAs everyone knows, corporate earnings today commonly include two bottom lines: Companies report net income and EPS under Generally Accepted Accounting Principles, and then there’s a second number on the street that takes out one-time items. These metrics are commonly called GAAP earnings and “operating earnings,” without one-offs.

Over the years the gap between these two numbers has been growing, so that operating earnings for the S&P 500 have averaged nearly 24% higher than GAAP earnings in recent years, says a column (“Investors, It Pays to Mind the GAAP Gaps”) Friday in the Money & Investing section of The Wall Street Journal.

Says the Journal:

It isn’t clear why the difference has grown so wide. One inescapable conclusion is that, since 1995, either by happy accident or accounting shenanigans, one-time losses have grown more quickly than one-time gains, elevating the operating earnings that Wall Street watches.

Investors have mixed feelings about excluding one-offs from earnings. When you throw in EBITDA or adjusted EBITDA, which proponents in some industries prefer as a tool for valuation, some investors are confused or skeptical. You may have heard unconvinced accounting profs push back on “Earnings Before All the Bad Stuff.”

The Journal observes that companies tend to label negative events (write-downs or special charges) as one-offs more often than happy events (windfalls or gains on assets), and excessive write-offs may signal deeper problems:

Investors are well advised to watch both figures for another reason: Some companies have bigger differences between GAAP and operating earnings than others. According to research by Société Générale quantitative strategist Andrew Lapthorne, those with bigger gaps tend to underperform in the long run.

An interesting cautionary note, that bit about underperforming long-term.

Companies need to be careful that one-time accounting items and adjustments do help investors understand the business realities. Inflation in the gap between as-reported and “operating” earnings raises questions. For IR professionals, clarity in reporting (including consistent accounting approaches) should be the goal.

What’s a good price?

August 5, 2009

Clunkers_in_JunkyardClunkers are in the news as part of the government’s weird but popular “Cash for Clunkers” stimulus program. Regardless of its policy merits, I’m pleased not to be in the market for a car right now, buying or selling. For me, anyway, the process is unpleasant – especially getting to the right price, including trade-ins and so forth. Plus clunkers, for now. The price always seems debatable.

Mergers and acquisitions seem a bit like that. As an investor relations person, I’m not part of the negotiating process for corporate deals. Folks who do negotiate the deals earn the big bucks – but that’s OK. My job is to communicate a deal once it’s done. I’ve enjoyed strategizing and helping communicate dozens of deals over the years, so I thought I might share a few ideas on M&A communication.

First, one more thought about clunkers: Buyers and sellers have different points of view in negotiating (and then communicating) a transaction. The pattern is so much a part of human nature that deal making spawned an ancient proverb: “‘It’s no good, it’s no good!’ says the buyer; then off he goes and boasts about his purchase.” The seller, also, has one story in negotiations – “You’re looking at an absolute gem!” – and later brags what a great price he got for the old heap.

Please don’t think me cynical. It’s just that, in communicating an M&A transaction, talking about price is one of the biggest challenges. Is it high, is it low? A windfall for the sellers, a bargain for the buyers? What comparisons can add perspective?

That single number – “How much per share?” – is the most important fact of the whole deal to shareholders of a company that is selling. It’s important, too, for shareholders of the buyer. Other questions about the deal, at least among financial audiences, often seek to shed light on whether it’s is a good price.

So how do we describe the price being offered or paid in an M&A transaction?

  • Realize that communicating a deal is a collaborative effort. Rules often are dictated by the delicate relationship between buyer and seller – and by their lawyers. Both sides have to be able to explain why this is a good deal for them. The lawyers provide cautious language and disclaimers to keep everyone on the right side of securities regulations. How about putting all the parties around a table to hash out key messages for communication? Or connecting the two communication staffs to cooperate on an announcement?
  • When a deal is almost ready to announce, the investment banker is a key resource for communicators who are crafting messages. Regardless of how you feel about i-bankers the rest of the time, they know how to sell a deal – and its price. A financial adviser’s fairness opinion typically is at the heart of formal communications to shareholders. Look for key messages and words in the presentations used to sell the deal to your board, and go from there.
  • Comparisons offer perspective – though picking the right ones can be tricky. The first place everyone looks is the “premium” – what percentage is the offer above the last price at which the target company’s stock traded? But that’s not the only comparison. A stock’s 52-week high is the most common benchmark used in negotiating public-company deals, according to a Harvard B-school study of 7,500 deals cited in the July-August 2009 CFO. If the offer is above the 52-week high, fine; if not, boards are afraid shareholders will balk. Providing the 52-week range is easy and factual.
  • Be prepared to discuss valuation measures. Whether or not you use them in a press release or formal presentation, metrics like multiples of EBITDA or book value (picking the right metrics is industry-specific) help tell the story to well-informed investors who already have a sense of what multiples are fair.
  • On the buying company’s side, consider how the price interacts with hoped-for the synergies, cost savings and strategic quantum-leaps that your CEO will want to discuss. And at least ask the question, “What kind of return do we expect to earn on this investment?” Shareholders like to hear that an acquisition is earnings-neutral, or accretive this year or next. But the bigger question is what’s the ROI or ROE we’re getting for shareholders’ money?
  • Talk about timing. Any deal being negotiated now has a lot to do with the stage of the business cycle – prices are depressed, sellers may be more willing because cash (or credit) is running out, and an expected recovery may figure into the buyer’s rationale for expecting an economic return. This context is relevant for shareholders on both sides.

All of which brings me to the TV game show “The Price Is Right.” You know, the 1950s-style program where contestants try to guess the true value of some consumer item. It’s been around so long Bob Barker had to retire, but the show goes on. Its durability, I think, comes from the fact that people enjoy debating prices and values of things. And that’s certainly true in the market for stocks of public companies – watch the argument triggered by just about any M&A deal.

In preparing to announce a sale or acquisition, therefore, investor relations people need to take price into consideration as a message. It’s a key question in any transaction. And I believe we should try to answer investors’ questions, even before they’re asked, as proactively and completely as possible.

Those are my ideas. I welcome your M&A insights – just click “Leave a comment.”