Influencing the Stock Price of the Bidder
In most M&A situations, the bidder controls the timing of when the bid is publicized. The notable exception to this is when there is a market leak, but even in these situations the leak either happens early in the negotiations when it is easier to deny to the press that any deal is pending (as the negotiations have not progressed sufficiently far for a deal to be in place) or late enough in the proceedings that an emergency communication plan should already be in place for just such a situation.
The announcement event is therefore not a surprise to the bidder. Through proper planning and the use of external advisers (including investment banks, but also specialist public relations firms), positive spin on the deal can be delivered to the market: Benefits to all stakeholders are emphasized; new markets are announced; product innovations are forecast. Support from clients, suppliers, and even outside parties (such as local government) can be rallied. Potential problems will have been anticipated, and strategies to neutralize these will have been developed and disclosed.
Nevertheless, to paraphrase Robert Burns, “The best laid plans of mice and men / Go oft awry.” In M&A deals, there are ultimately just too many individuals involved and there is just so much that can go wrong that much often does. Therefore, the press turns negative, equity analysts forecast too much dilution of earnings, cash flow declines, and clients, suppliers, employees, and even managers become very worried about their positions—and naturally assume the worst.
Thus the acquirer must have a very robust communications plan at the ready. Not every contingency will be anticipated, but many can be. Most important is to have teams in place to be able to respond quickly to any false rumors and to replace immediately any such gossip with fact. The company needs to stay in control—as best it can—during the entire deal process. The most effective way to do this is to have a continuous stream of positive stories prepared for periodic, if not even daily, release. Constant communication with the staff of both bidder and target can go a long way towards allaying anxiety and even panic.
One must remember that those who can benefit from the flip side will be acting accordingly as well: these include competitors who see opportunities to grab market share and even valued staff, and trading arbitrageurs who have made bets in the market that the share price will fall. These arbitrageurs certainly have been very successful in pushing down the price of acquirers in many deals, as in the above example where the Deutsche Börse was forced to drop its bid for the London Stock Exchange.
Other Factors Affecting Equity Values
The above discussion “averages” the results for many companies. Individual deals and individual companies will show different results and provide different returns over time from these averages, and takeover and defensive tactics will also need to be customized for each situation.
There are also other factors that will impact on the equity markets for both the target and bidder’s share price. When cash is used to finance the deal instead of issuing more shares, the returns to the bidder are usually higher. In countries such as the United States, where tender offers (often hostile) are common, these do better than friendly mergers. The smaller the target is in relation to the acquirer, the more likely it is that the bidder’s share price will not decline relative to the market.
There are also differences in short- and long-term shareholder value effects. This article has looked principally at the short-term effects around the time of deal announcement, but if a longer-term perspective is taken (more than six months), then the negative returns to the bidder are reduced, although still typically remaining negative. Also, one can look at the combined returns when the bidder and target are taken together over the longer term: in this case as noted earlier, history shows that the overall shareholder wealth effects are typically positive.
Despite the doom and gloom of the analyses that have looked at the success of companies that merge or acquire, there is some hope: Several recent studies (from Towers Perrin/Cass Business School, McKinsey, and KPMG) have shown that acquiring companies since 2003 are doing better with their deals. Not much, but at least measurably so. Some of the suggestions we’ve made in this article have been recently more widely adopted by the market. There is more focus on careful deal selection and corporate governance. Post-merger integration is receiving attention even before the deal closes, and sometimes even before announcement. There is hope—and evidence—with some of these recent studies that perhaps equity markets may start to award an equity premium to companies that acquire well.
Making It Happen
The Key Factors
Understand that the premium offered to the target is only one aspect of the deal’s success, and that it is often overshadowed by other factors, especially people issues.
Formulate a plan for addressing surprises. Try to identify all the ways that the deal could fail … and then look for still more ways it could go wrong.
Do not be overconfident in your ability to integrate an acquisition successfully. Prior experience is helpful, but not sufficient. Each deal is different.
Proper legal advice should always be taken.
Plan for a dynamic deal process where changes will need to be made to the acquisition strategy.
Incorporate a robust communications plan into any deal.
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