Mergers and acquisitions (M&A) are key drivers of growth for many companies around the world. Although M&A activity is down so far in 2016, according to Bloomberg, the number and value of mergers and acquisitions globally has been on a steady rise, increasing 38% and 111% respectively from 2013 to 2015. With M&A playing a more critical role in how companies grow, it’s important for IROs to know how to message the value of an M&A deal to their analysts and investors, as a misunderstanding or lack of understanding of the benefits (and challenges) of a deal can have a potentially detrimental impact on a company’s stock. Alternatively, a well-messaged deal can bring greater understanding by the Street and potential upside to a company’s stock. During the last 10 years at OpenText, I’ve had the privilege of being involved in 25 acquisitions; below are a few best practices that we follow at the company.
Communicate the Strategic Rationale
The most important component of messaging a deal to the Street is explaining the strategic rationale as to why the acquiring company decided to buy the target. The IRO is integral to the creation of this messaging and providing feedback on whether or not the Street will ‘buy’ it (no pun intended!). When developing the rationale messaging, the IRO of the acquiring company must be able to explain how the deal furthers the company’s operational and financial strategy and how it fosters operational, financial and strategic growth. IROs need to think of the big picture when answering these deal-specific questions. For instance, if the acquirer’s overarching strategy is growth through M&A, supplemented by organic growth (as in the case of OpenText), this would be the broad rationale for the deal. However, the elements that each deal brings are also important and can be positioned as further support for the deal. Some reasons that could apply include:
- Increase in market presence in certain industries;
- Increase in market share by acquiring a competitor or peer;
- Entering a new market;
- Addition of new functionality in terms of technology/assets;
- Increase in geographic footprint in certain areas of the world; and
- Increase in the company's size.
Sometimes companies adopt a myopic view of an acquisition, focusing solely on the benefits of a standalone acquisition without linking it to the broader company strategy. Months or years down the road, this acquisition can become difficult to explain and give the impression of disjointedness in a company’s strategy and messaging. This could result in the Street questioning management’s decision-making abilities.
Be Aware of Key Metrics
The Street is trying to ascertain the financial impact of every deal on a company, in terms of revenues and whether the transaction makes the company more levered through debt. Analysts will be trying to model these impacts to properly value the company. There are many metrics that apply, depending on the type of deal. The IRO can add value by ensuring that management knows what metrics will be the focus and providing counsel regarding what should be disclosed. Some examples are outlined below.
Measurement of valuation and financing
- Valuation of the deal: how much did the company pay on a forward revenue basis, price to earnings basis, enterprise value to EBITDA (EV/EBITDA) basis, or Discounted Cash Flow (DCF) basis. These metrics may be sector and deal specific. With these metrics, analysts are trying to figure out if the company paid fair value for an asset, overpaid, or bought it for a discount.
- Deal financing: did the company finance the deal through cash, debt, equity or a combination of all three. Analysts are trying to determine if the acquisition will lever up the company; if so, the IRO must be prepared to explain the plan to delever and a timeframe to achieve this. When issuing equity, be familiar with exchange regulations as significant dilution may trigger the need for a shareholder vote.
Measurement of success
- Accretion: what is the expected increase in value for shareholders on an earnings-per-share basis, cash-per-share basis and a NAV (net asset value) basis. Sometimes an anticipated timeframe is given.
- Are there expected cost savings and when will they be provided? At OpenText we often state when we expect a company to be fully onboarded to our target operating model, which has an adjusted operations margin range.
- Are there additive revenues and if so when can the Street expect to see this? The information is not always provided but certainly almost always requested by the Street!
- Have other return metrics previously been disclosed? If your company has given any return on invested capital (ROIC) or internal rates of return (IRR) in the past, analysts will look for updates.
- Run rate of acquired revenue; will there be an attrition in the target company’s revenue after it’s acquired and if so can this be quantified (i.e. by what percentage).
There are also non-numeric measurements of the success of the acquisition such as the extent and timing of integration of the technology or assets into the company’s infrastructure and how well the two companies’ cultures match. This is one of the most important elements for OpenText, as it can make or break the successful integration of an acquisition.
Choose the Best Communication Tools
Securities law in Canada and Regulation FD in the U.S. require companies to press release material information; M&A is often considered material. The IRO will generally work closely with key members of the ‘deal team’ (usually consists of corporate development, legal counsel, management and technology or subject-matter experts) to develop the press release. The target may also choose to issue a press release, which should be reviewed by the IRO and the deal team to ensure that it doesn’t conflict with other messaging. If the deal is significant in terms of strategy or size, consider creating additional materials such as FAQs (mainly internal for management and employees) and presentations and/or hosting a conference call with management to ensure the Street fully understands the deal and has an opportunity to ask questions. It’s also helpful to have a separate section or portal on the investor website dedicated to M&A, showcasing all of the materials for the most recent deal.
Reach Out to the Street
Once the news is public, hit the phones and reach out to sell-side analysts and major holders to ensure they know about the deal and all the reasons why it will bring value to the company and its shareholders. Depending on the significance of the deal, and management’s appetite, perhaps hit the road and do a post-deal roadshow, working with brokers to target major holder city-centres for maximum shareholder education. If the target company is public or has public debt, it may be worthwhile to reach out to its shareholders and/or debtholders.
Crossing the Finish Line Prepared
When approaching the close of a deal, things move extremely quickly. The deal team is working around the clock to ensure all demands are met on both sides. This usually leaves little time to prepare and review messaging. Therefore, it’s good to have the homework done in advance on the company being acquired, including knowledge of its products/services, customers, revenue breakdown and financial performance, as well as plans for the target once acquired. Early preparation of drafts of materials (releases and presentations) will allow the IRO to quickly complete these in the eleventh hour of the deal close timeframe.
M&A can be a very exciting element of the practice of IR, so hopefully these best practices will help readers successfully – and sanely – get through the next deal.
Sonya Mehan is the Senior Manager of Investor Relations at Open Text Corporation in Waterloo, Ontario.