Posts Tagged ‘M&A’

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.

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Tax goodies for investors

December 17, 2010

I’ve been holding my breath until Congress came to grips with not raising taxes – and I can exhale, now that “the Bush tax cuts” have been signed (once again) by a president. George W. Bush and Barack H. Obama – who’d have thought it?

Three cheers for compromise, bipartisanship and not shooting our economy in the foot as of Jan. 1. So here are the tax goodies that apply to investors:

  • The top tax rate on dividends remains at 15% through 2012, a boon to shareholders of companies with healthy yields. Investor relations people for utilities and other firms with attractive dividends should breathe a sigh of relief.
  • The top tax rate on long-term capital gains also remains at 15% for two years. So equity investors are encouraged to keep taking risks in pursuit of gains. And this helps public company shareholders and small business owners with gains in M&A transactions.
  • Some industries may profit from specific cuts – e.g., extensions of the R&D tax credits and incentives for businesses to buy capital goods.
  • Of course, the tax bill is also a stimulus bill. Retail spending and GDP should get a shot in the arm from keeping the Bush-era tax rates for all, AMT patch, extension of unemployment benefits and 2% cut in payroll taxes for 2011.

You can debate whether all this is good policy, either in the way it structures our income taxes or the way it affects near-term deficits. There is controversy. But I’m glad to see it resolved – in favor of keeping money in the hands of the people.

Of the tax-bill coverage I’ve seen, Forbes’ “Tax Dude” blogger Dean Zerbe has the best headline …

The Tax Bill: Santa Comes Early

… and by far the best illustration, showing “Obamaclaus.”

Merry Christmas to all, and to all a good night.

© 2010 Johnson Strategic Communications Inc.

The balance sheet & all the rest

October 30, 2010

Legendary value investor Marty Whitman gives a good interview on investing in the October 30 Barron’s. It’s a fun read, if you like to gather wisdom from folks who have been around Wall Street for more than a few bull – and bear – markets.

The 86-year-old founder (and still chairman) of Third Avenue Management talks about value investing, the need for transparency in markets, short sellers, lessons from the latest financial crisis, and academic theories (he doesn’t much like them).

Investor relations people may benefit from Whitman’s No.1 lesson from the 2008 financial meltdown: the importance of the balance sheet, which IR messaging often skimps on or ignores. And his No. 2 lesson: the importance of management in protecting investors from getting clobbered by something like the ’08 crisis.

Both should be themes for investor communications, especially now.

Whitman’s advice to other investors also has applications to IR:

You have to be gestaltist. Every accounting number is important, and is derived from other accounting numbers. So you have to understand the whole accounting cycle. If I want to estimate earnings, and I only have one tool, I would pick the current balance sheet.

As a value investor, what you are interested in is whether the company is creating wealth. There are four ways to create wealth; it is not just cash flow. They are [bullets added]:

  • One, having cash flow from operations available to security holders. A company can use that cash to expand its asset base, reduce liabilities or distribute the money to shareholders, either by paying dividends or buying back stock.
  • Two, and probably much more important, is having earnings, which we define as creating wealth while consuming cash. Remember, though, that earnings for most companies do not have a long-term value unless the company also has access to capital markets because if it doesn’t, sooner or later, it will to run out of cash.
  • The third—and very, very important—value-creation method is resource conversion. … Mergers and acquisitions, changes in control, massive recapitalizations, spinoffs, etc.
  • The fourth wealth-creation method … is having extremely attractive access to capital markets.

Food for thought as we develop messages for annual reports, presentations and financial releases. Many companies give a nod to “creating shareholder value” but fail to spell out the strategy for doing so.

Investors in most companies would benefit from management doing a better job of showing shareholders how business results – and changes in business strategy – work through the income statement, balance sheet and cash flows. Basic IR.

© 2010 Johnson Strategic Communications Inc.

Before doing that IPO …

June 30, 2010

Think twice – maybe you should even take a third, fourth or fifth look – before going public, Erik Birkerts advises private-company owners in a piece called “Hey, Where’s My Gulfstream?!” in the July 2010 issue of Mergers & Acquisitions.

Birkerts, a veteran of venture-backed companies that did IPOs in 1999 and 2007, now is a partner in Evergreen Growth Advisors, which consults on growth strategies. His reflections on the process offer some useful insights for investor relations professionals and senior management – before or after an IPO.

“The initial public offering of stock – the IPO – holds a mythical place in American business,” Birkert observes. “Employees consider the IPO to be synonymous with windfall riches. Company founders envision the IPO as the ultimate validation of their genius after years toiling on their ideas. Venture capitalists finally look forward to full nights of sleep with the anticipated returns from the IPO ‘exit’ juicing their portfolio. The siren call of the IPO for company lawyers, bankers and accountants is so loud and obvious that no further comment is needed.”

With the IPO market showing some signs of reviving in the first half of 2010, it may be prudent for management teams to – well, look twice before leaping. The M&A journal (which may have a bias as implied in the publication’s name) is available only to members of the Association for Corporate Growth, a private equity and deal-oriented group, so I’ll summarize the steps Birkert advises:

  • Carefully dissect arguments for why the company should go public
  • Have a specific plan for using the capital & communicate it early and often!
  • Challenge your thinking with independent, objective outside advisers
  • Operate from your worst-case financial scenario
  • Select your investment bankers wisely

Birkert notes that management may think of “many terrific reasons to go public,” but “there are as many or more reasons why going public should be feared.” IROs and IR counselors already know these reasons – distractions for management, Sarbanes Oxley burdens, expenses of legal, auditing, IR and other costs, etc., etc.

I particularly appreciate two pieces of Birkert’s advice aimed at not disappointing investors who buy in the initial offering:

  • Communicating your plans for use of the capital. “Although public filings may have generic language, it is best to be explicit during the road show so that the Street accounts for this spending [of the money raised].” If capital goes toward expenses, the early earnings as a public company may disappoint, he says. Worse yet, if management doesn’t have a clear plan, there will be pressure to do something, which sometimes leads to an ill-considered acquisition as a strategic but risky deployment of that capital.
  • Using a worst-case financial secenario. “The temptation is to make the financial forecasts sparkle so as to make the road show pitch compelling to potential investors. … However, if there is one time that Murphy’s Law can be counted on it is during the first year of being a public company. … Be conservative with financial forecasts. Set yourself up to succeed – not to fail.” Leaving a little money on the table during the IPO is better than setting yourself up for a bruising stock-market experience – and litigation.

Not trying to be negative here. I love public companies and the whole relationship with capital markets. But Birkert’s cautionary words echo the sentiments of many small cap IR people – and CEOs and CFOs – who are public but look longingly at privately held peer companies whose “exits” or “liquidity events” kept them private.

© 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.

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.

A dry summer ahead for funding?

April 8, 2009

The financial crisis and depressed market are a life-threatening drought for many biotech companies, according to an April e-newsletter from the Biotechnology Industry Organization. Says BIO:

There may be no summer lovin’ for biotechs. By most accounts, investors will remain tight-fisted with their cash for some time, opening up their wallets for only the most promising investments.

Writer Eric Wahlgren cites Burrill & Company estimates that more than a third of 344 public biotechs were down to less than six months cash on hand at the end of the first quarter.

Despite the gloom, there’s still investment money out there, but companies will have to work harder to get it, experts say. The key to being successful at raising money in the current environment will be to think creatively, remain flexible, and start talking to potential investors well before there is an urgent need for cash.

In the BIO piece, industry players suggest biotechs may have to tap existing venture capital investors for inside-led rounds, consider venture debt, outlicense more compounds for the cash, set up special financing structures and the like.

One example of creative dealmaking is Exelixis, BIO says:

The advice for companies looking for cash, [Exelixis CFO Frank] Karbe says, is that they should always be having lots of discussions with all types of investors, including bankers, venture capitalists, specialty funds, and other biotech and pharma companies.

Thinking creatively and working harder, by the way, may mean experiencing more than the usual pain in fundraising and valuation – for example, selling the company when you’d rather just raise cash.

The advice to biotechs – work hard, stay flexible, be creative – probably applies to investor relations teams in many industries. Money doesn’t seem likely to rain down on anyone in 2009.

A surprise in the cereal box

March 23, 2009

surprise-in-cereal-boxImagine my delight when I opened up a box of Cheerios and found a surprise inside: a snap-together plastic sports car. Cool! … Yes, I know. They say men are just 8-year-old boys in grown-up bodies, and this explains my glee upon running across a cheap little toy.

Call it quirky, but the surprise in the cereal box made me think of investors and their reactions to a pleasant surprise. We’ve all seen the pop in a company’s stock price when it beats earnings estimates.

But there are other surprises a company can give its shareholders.

Investor presentations offer an opportunity. How about surprising an audience with a speech offering deep insights into your industry and markets, rather than the usual data-dump-in-a-Powerpoint-file? How about announcing a news item at a meeting, approximately simultaneous with a broad release? Or brightening up an analyst day with a bit of entertainment? In a small way, just running on time is a nice surprise (beating a 10- or 20-minute limit demands two disciplines: saying only what matters, and practicing to nail the time).

A little psychology on the substantive side also can help relationships. Sure, there aren’t many positive surprises – earnings or otherwise – in today’s brutal economy. And you can’t hold back material information.

But IROs can help management look for opportunities to highlight an unexpected benefit or unpromised outcome. An acquiring company can deliver synergies faster than projected. A new CEO can implement changes he hasn’t been ballyhooing publicly. A cost-cutting program can exceed its targets. In each case, management can influence both what it promises up-front and how well the company executes. Never over-promising should be a core principle of IR.

For investors, a surprise is like finding a toy in the cereal box. Cool!

(I’m going to go play with my car now.)

© Copyright 2009 Johnson Strategic Communications Inc.

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.