Archive for the ‘M&A communications’ Category

Let’s make a deal

May 27, 2014

Mergers and acquisitions are resurgent – a factor in the stock market’s buoyancy, a topic of conversation everywhere and a sometimes challenging reality in our jobs as investor relations professionals.

The current issue of Barron’s advises investors on “How to Play M&A” and offers some stats from Dealogic:

So far this year companies have announced deals worth $1.52 trillion that are either completed or pending, according to Dealogic. That’s up 56% from last year and marks the largest dollar amount for deals since the $2.06 trillion recorded during the same period in 2007. Jumbo deals in particular are making a comeback.

Mergers, divestitures and other deals are popping up all over. The top five sectors are healthcare, telecom, real estate, tech, and oil & gas. Make no mistake, M&A is cyclical, as seen in this chart from Barron’s:

M&A deal value by year

If you observe that the last two peaks in M&A activity coincided with stock market “tops,” you’re not alone – although Barron’s believes this bull still has room to run, in both stock prices and deal flow. We’ll see.

My point here is that IROs and IR counselors should develop M&A communication as a core competency. Mergers are so important to the strategic future of most companies – as buyer, seller or competitor – that we need to dig deeply into how deals do (and do not) create value for shareholders. And we need to consider how to tell that story.

The first instinct of some CEOs, and IR people, is to trot out familiar M&A bromides: “strategic combination,” synergies, “merger of equals,” 2+2=5, “critical mass” and excitement about the future. The press conferences are all smiles. Not that these stories are false, but they don’t tell investor whether the transaction is really creating value.

Worse yet, merger messaging can arise from defensiveness. Execs who have spent months thrashing out a deal may draw talking points from the touchy issues: where the new headquarters is or how the top jobs are divvied up. Significant maybe, but not the main point for investors.

Here are three key needs to consider in communicating M&A:

  • Strategy. An acquiring company must explain why the deal makes sense and keep explaining it. Strategy is not a combined list of products or expanded footprint. It’s how the deal changes your competitive position, how it changes who your company is, three to five years from now.
  • Metrics. Besides adding two companies’ sales together, merger announcements most commonly discuss forecasted cost savings and change to EPS (acquirers love to say “accretive”). How about operating cash flow per share? Return on capital invested vs. your cost of capital, or change in return on equity overall? Impact on dividends?
  • Follow-through. Success in M&A is all about integration, and IROs can help execute the strategy. When it comes to telling the story, plan for follow-up announcements as milestones are achieved. Track those metrics and report the progress. And keep explaining the “why.”

I’m not saying these are the answers. Getting the right messaging depends on all the specifics of your company, the deal that’s in front of you, your industry and what your investors care about the most. But developing that messaging with the CEO and your deal team is one of the most important jobs of IR during a time of transition.

IR professionals also play a central role in managing communication. It’s critical to lay out a detailed timetable for all communications that need to take place on Day 1, announcement day, and following.

Delivering the right investor messages, tailored for each audience, is essential in playing “Let’s make a deal” as a public company.

© 2014 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.

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.”

M&A clichés don’t ring true

June 15, 2009

Examples abound of acquisitions that ultimately fail to benefit shareholders, and the wipeout in market values since 2007 has provided lots of new case studies. Exposure of deals-gone-bad serves as a cautionary tale for people who write merger announcements: Too often, standard M&A clichés don’t ring true.

One case in point – the 2006 acquisition of apparel retailer J. Jill by Talbots – is Michelle Leder’s subject in “On M&A Math,” published June 9 at Footnoted.org, a blog dedicated to digging up and highlighting glitches in company disclosures. Talbot’s bought J. Jill for $517 million three years ago. Last week, Talbots said it was selling J. Jill to a private equity group for just $75 million, about 85% less.

Leder writes:

Whenever a deal is announced — and a bunch of them have been lately — there’s the inevitable press release that talks about synergies and how the deal is going to enhance shareholder value. Indeed, that’s pretty much a mandatory sentence. But things don’t always turn out as planned when it comes to M&A, or, quite frankly a lot of other things …

In the February 2006 release on the retailers linking up, the Talbots CEO used several M&A bromides:

Working together, we expect to capture the significant growth potential of the J. Jill brand and enhance shareholder value. We believe our proven expertise in managing a complex multi-channel operation will enable us to maximize the cost synergies of our similar business models, particularly in back-office functions.

In the June 2009 exit announcement, a different Talbots CEO declares:

This is a significant strategic step forward for Talbots as it enables us to focus our time, resources and attention exclusively on rejuvenating our core Talbots brand and return to profitable growth.

Synergy. Shareholder value. Growth potential. Expertise in managing complex operations. It’s too bad when these things come to naught. Of course, the financial crisis and recession have overcome many companies that didn’t merge, too.

But it seems to me that investor relations professionals should learn something from witnessing the wreckage of various mergers in recent years. We should anchor our statements about M&A transactions in specifics, not the traditional broad-brush claims of reaping synergies and enhancing shareholder value.

Go out & play defense!

February 26, 2009

The rummage sale level of stock prices has produced an uptick in hostile takeover activity – and in the fear of unwanted suitors – according to the March 2009 issue of Mergers & Acquisitions magazine. As might be expected, there’s a step-up in defensive play among CEOs, boards and investor relations people:

Until last year, the activist investor community had seemingly convinced companies that shareholders rights plans and the cherished poison pill were against the best interest of shareholders. However, as hostile activity seems to be ramping up, management teams are returning to more aggressive defense strategies.

(Poison pill defenses, for example, surged in late 2008 after several years in decline. According to FactSet Sharkrepellent, December saw 28 poison pill adoptions, the most in any month since 2001. Full-year 2008 adoptions of 127 poison pills were the most since 2002, FactSet says.)

M&A writer Avram Davis notes that lawyers often are the key players on defense. They encourage measures like language in bylaws to require advance notice of proposals for shareholder meetings, safeguards against activists’ calling their own meetings, and systems for tracking flow of confidential information to prevent its use against the company.

Another defensive strategy goes to the heart of investor relations:

Perhaps the easiest protection against hostile takeover attempts is among the least practiced – shareholder communications.

Joseph L. Johnson III, chair of the M&A and corporate governance practice at Goodwin & Procter LLP, tells M&A many companies have gotten out of the habit of meeting regularly with shareholders. Johnson (no relation) says this is dangerous, because you can be sure a hostile bidder will be actively reaching out to your investor base.

‘I’ve been telling people for years, it’s like you’re running for Congress,’ says Johnson. ‘You need to get out there and press the flesh.’

Staying in close touch with investors is essential. And going out to address concerns and explain the business strategy is the best way to communicate that management is serious about creating value.

Mergers, the Death Star & IR

January 27, 2009

Not all mergers are marriages made in heaven, and the ongoing Bank of America-Merrill Lynch saga is providing plenty of support for the skepticism many investors hold toward M&A as a way to create value.

Today in The Wall Street Journal, Merrill ex-CEO John Thain responds to a whispering campaign blaming him for the souring of Bank of America’s ownership of Merrill (“Thain Fires Back at Bank of America”).

Thain was shown the door last week by Ken Lewis, B of A’s CEO. The parting came amid talk by sources around Bank of America that Thain surprised the new owner with Merrill’s $15 billion fourth-quarter loss – and rushed out bonuses to Merrill employees without telling B of A. Not so, Thain is now telling everyone.

But the tidbits are as revealing as the central facts …

  • Merrill Lynch employees apparently refer to Bank of America’s I-banking headquarters in midtown New York as the Death Star, the dark and dangerous fortress of the evil empire in “Star Wars.”
  • On the Bank of America equity trading floor, employees reportedly gave a standing ovation to news of the Merrill chief’s departure.
  • Some other top Merrill execs had already fled the company before Thain’s resignation, contributing to the feeling of – well, rats leaving the ship.
  • Bank of America employees, expecting their bonuses this week, reportedly are envious of Merrill people over what looks like a sweet deal – Merrill handed out its checks before the deal closed on Jan. 1.
  • Thain expresses contrition (some) over spending $1.2 million redecorating his office suite as America’s financial system was unraveling. He now says he’ll pay the firm back for the pricey curtains and fancy antiques. (BTW, Thain’s interior designer has a new gig: decorating the Obamas’ White House residence.)
  • Thain has hired PR man-to-the-stars Ken Sunshine – yes, “Mr. Sunshine” – to help spin the defense against the whispering campaign.

None of this points to the happy family image of a merger. Of course, this was a shotgun wedding negotiated at the worst moment of the financial crisis back in September. M&A under duress is bound to lead to more stress.

Forces much more powerful than investor relations, obviously, led to the B of A-Merrill Lynch acquisition. And that may always be the case. CEOs sign deals; IROs only communicate them.

But investor relations professionals should study the risks of M&A. Especially as consolidation becomes a common solution for hard times, we can counsel CEOs on the challenges they must overcome: Integrating two groups of people is the biggest issue. A clash of cultures must be addressed openly, not glossed over with handshake photo-ops. Mutual suspicion, “Us vs. Them,” and comparisons of compensation run rampant in mergers. You must deal with them proactively.

Investors know that integration – the people side of managing a newly combined business – is critical to success. So IROs should counsel management to think deeply and communicate around these issues in M&A.

Communicating value … to an 800-pound gorilla

November 5, 2008

One upshot of the current environment, for some companies, is a change in the identity of our true audience. As an investor relations person, I’ve always thought of investors – individuals, portfolio managers, value, growth, whatever – as the audience.

But it’s not always so.

I was reminded of this by “Preparing for a Shrinking Economic World,” a column in the Nov. 1 issue of Genetic Engineering & Biotechnology News. Speaking of the biopharma business (as you might guess from the publication), the article notes that giant pharmaceutical companies are awash in cash – $9 billion on average among large caps – while the bear market limits the options of smaller companies:

Alas, there is one liquidity event that won’t be appearing any time soon: the biotech start-up going public. Since the first of several painful Wall Street events began, there have been several biotech companies that have withdrawn their plans to go public … This clearly leaves biotech in a state of vulnerability, as IPO hopefuls may seem further from exit. This also means that ready, willing, and able buyers from Big Pharma will perhaps make a strategic acquisition.

A piece in the Nov. 10 issue of Fortune, “Big Tech Goes Bargain Hunting,” makes exactly the same point about small to mid-size tech companies and the cash-rich giants of technology.

Truth is, this applies to many industries. I’ve heard entrepreneurs in a variety of businesses talking about exit strategies: Private companies no longer count on doing IPOs, but view their most likely exit as being acquired. In the public company world, too, smaller companies are thinking more about acquisition as a path to maximizing shareholder value.

So let’s talk about the 800-pound gorilla. Our audience may not be a mutual fund analyst in Boston or a little old lady in Kansas City. The real target audience (or at least one) may be a bigger company that, in a few months or years, may replace our many shareholders with a single 100% owner. And our public disclosures also influence these potential acquirers.

Are the messages the same, or different, for an M&A audience? As investor relations professionals, committed to maximizing shareholder value, we need to study up on this class of investors. They may be strategic acquirers in the same industry, or financial buyers like private equity funds. I don’t know all the answers, but we ought to re-read The Quest for Value and pay attention to news and trade articles explaining the motivations and structuring of acquisitions.

My impression from a few M&A experiences is that deal-oriented investors do have different information needs, or preferences. Earnings per share are out; the acquirer or i-banker will apply ratios to EBITDA or net income. Enterprise value, debt on the books and cash in the bank are intensely relevant. Assets that can be sold matter. Working capital and cash flow. In the biopharma field, and perhaps others, future products also drive value – again, often via multiples of projected cash flows.

I remember, years ago, writing an annual report for my employer – our last as a public firm – while top management was negotiating to sell the company. The deal was finalized in the same time frame as the annual report. It was gratifying when, a few weeks later, someone on staff with the new owners told me their top management had been especially impressed by the extensive new-drug pipeline graphic that had been a labor of love in this annual report. IR mattered.