With shifting global market dynamics, rapid advancements in technology, and evolving customer demands, companies are increasingly seeking growth to drive shareholder value creation through transformational acquisitions. These large “bets” are replacing a “go-slow” approach with tuck-in acquisitions or organic growth.
Transformational acquisitions significantly change the nature of a company by entry into new markets, channels or products, and in turn can drastically change its financial profile and capital structure. As a result, companies not only need to have a concise, consistent message that is communicated across stakeholder groups, but they also need a clear roadmap for how the story evolves beyond the announcement of the deal.
Before the Announcement
Communicating your M&A Strategy
When faced with the possibility of a transformational acquisition, early planning becomes more critical.
It is important to be clear on management’s long-term vision of the company and how acquisitions, large and small, could play a part in advancing its strategy. Company leaders must communicate this vision as an important element in the stewardship of shareholders’ capital. How would acquisitions fit within the overall company positioning? What are the financial metrics management would use to evaluate acquisitions? How does management determine capital deployment in areas of the business expected to deliver the highest risk-adjusted returns?
Know Your Shareholders
A transformational acquisition could trigger a radical change in the company’s shareholder base, for several different reasons, from a current group of long-term oriented shareholders to short-term event-driven investors, and ultimately, to a new set of long-term investors. For example, many funds have financial leverage guidelines, which may trigger the liquidation of a position, even though the acquisition may make strategic sense. Or, the institutional investors within your base may not have the appetite for higher risk. Managing this transition is critical. Management needs a clear understanding of who is in your base, the current sentiment, and how these investors might react to such a transaction. As a result, the transition can be supported by identifying those investors at risk of selling and those who could support the company through its transformation.
Drive to a Successful Announcement
Engage as early as possible to establish an integrated communications platform across all stakeholders – sell side, current shareholders, potential shareholders, the media, employees of both companies, suppliers, customers and the public. The plan should be built with clear “roles and goals” to ensure proper execution in a potentially very complex and fluid situation. A leak of the news before its official release is always a risk, so be sure to anticipate how to manage this possibility.
It is important to build the transaction narrative that clearly articulates the reasons for the acquisition, the path to shareholder value creation, and the eventual outcome of the integration. What is the strategic imperative for the transaction? How does the acquisition enable the company to serve more customers (or current customers with more products), expand geographically, or add important technology? How does the transaction position the company against current megatrends?
The ability to communicate the financial roadmap is just as vital. In addition to understanding the combined-company financial model, investors will want insight into the costs and timing of integration. The path and sources of funding for debt reduction may also be key to the investment story, as well as having a clear view and measurement of cost synergies. Identify and be prepared to address how the company will manage such key potentially large and complex risks as ERP and employee integration, including cultural issues. Don’t underestimate the level of detail some investors might demand.
Plan for the Future
It is often said that the real work begins once a deal closes. A post-transaction communications playbook can be an invaluable tool to help guide IR activity for the 12-to-18 months following the transaction, or even longer. The playbook anticipates how the company will address key investor concerns, plus the plan to report on integration milestones and other points, such as details on new customer wins and the achievement of significant cost savings. In addition, the acquisition rationale should remain a part of the messaging platform, both during and after the integration to demonstrate management’s ability to strategically transform the company and extract value for the benefit of shareholders, customers and employees.
Common landmines for companies that have announced a transformational acquisition could include:
- Outlining the growth and profitability profile of the combined business – Are the margins different? What are your synergy expectations? Can you – and should you – quantify revenue synergies?
- Shifting guidance policies – How will you communicate your expectations in the interim between the announcement and closing of the deal? How will you treat guidance after close, particularly if the timing of the close creates partial periods?
- Cross-border transactions – How are you communicating the complexity of the deal structure? How are you managing varying investor stakeholders in a tender offer situation?
- Unanticipated integration issues and costs – While the integration of the business often prioritizes employees, astute investors are trying to find the areas that may cause headwinds for the acquiring company, such as partner relationships. Are you communicating rational assumptions that may increase integration costs, i.e. risks associated with large-scale IT integrations, cultural synergies, etc.
“The success of a transformational acquisition is 50/50. Why wouldn’t I take profits and let some other investor take that risk.”
-$5 billion AUM value investor, PM
“I think a lack of a clear strategic intent is what usually sinks these acquisitions. Companies surprise the Street with something out of left field and then wonder why the stock drops so much.”
-$65 billion AUM, Value investor, Sector Analyst
“The handful of times that we stayed with companies who levered up [to complete a transformational acquisition], it always blew up on us. I essentially told my investors that I don’t do that.”
-$11 billion AUM, Value investor, Small-cap PM
“Our main concern around transformative acquisitions is disruption. In any business, there’s always that fear of, what’s that “oh, no” moment, and that is really a disruption. When you go from no debt with cash on hand to a highly-levered company, you can’t make the problem go away.”
-$20 billion AUM, GARP investor, Technology Analyst
While it may not always be possible, the longer the planning period, the better for communicating a transformational acquisition.
- Do the leg work early, long before announcing the transaction – make sure you have an ongoing pulse on the sentiment among shareholders, understand the risk that exists within your base, and work to build a set of investors that would step up and support the stock.
- Build a clear roadmap with benchmarks, to communicate not only the long-term vision of the combined business, but also the interim milestones you hope to achieve to provide an evaluation mechanism for investors.
- Have a clearly defined shareholder engagement plan at announcement, but more importantly, in the weeks and months following the announcement.
Ultimately, the success or failure of any acquisition rests in management’s ability to create value in the combined organization by generating accelerating sales growth, higher profitability and greater returns on invested capital. And, the stakes are much higher in transformational deals. Providing clear, concise and timely communication on the financial, operational, and organizational issues, both before and after the transaction, will help build investor confidence and drive to higher valuation.