- Investors negatively reacted to six out of 10 mergers and acquisitions from 1995 until 2018, and less than half of the transactions yielded the promised value, according to an M&A study that the researchers say underscores the importance of presenting a convincing argument for a deal on Day 1.
- Businesses tend to focus on getting the deal approved rather than on providing investors during announcement day with a detailed roadmap for ensuring that the deal works, according to Mark Sirower, co-author of the recently published “The Synergy Solution” that focuses on 1,267 deals during three merger waves.
- “You’re trying to solve a classic asymmetric information problem, which is that management presumably knows more about the numbers than investors,” according to Sirower, a leader in M&A and restructuring at Deloitte. “Investors want to know that you have a plan, so if you signal that you don’t have a plan and you’re going to pay a 20%, 30% or 40% premium [for the acquired company], then you’re going to lose that value” in share price over time.
Early this year CFOs planning to push forward with M&A found inspiration from 2021, when deal-making by many measures hit record levels fueled by ample available capital, record-low borrowing costs and a robust stock market.
The deals market slumped during the first quarter. Faster inflation, slower growth, rising interest rates, stock market volatility and geopolitical instability stemming from Russia’s invasion of Ukraine prompted CFOs and other deal-makers to pause in deal-making.
The total value of worldwide M&A fell 23% to $1 trillion during the first quarter compared with the same period in 2021, according to Refinitiv. The total number of announced deals decreased to 12,601, a 19% decline compared with the first three months of last year.
“M&A markets don’t like volatility,” Sirower said in an interview, noting greater difficulty in finding agreement on a company’s value. “Things get a little bit sticky because deals on the table get frozen.”
CFOs should follow some basic guidelines in order to ensure success during Announcement Day and thereafter, Sirower said.
First, the announcement should be the culmination of weeks of evaluating and confirming gains from a planned transaction, he said. It is an opportunity to share the logic, synergy targets and expected value of the deal as it unfolds in the future. Such details are especially important if the acquiring company is paying a premium.
“Investors want answers,” Sirower said. “You’re either giving investors reasons to buy your shares or sell your shares.”
Second, employees as well as investors need clear guidance on coming changes, including details on new top management and reporting relationships, he said. “Don’t inject uncertainty into the workforce.”
“All of a sudden, employees wonder, ‘Am I going to have a job, or going to have to move?’” he said. They will want to know frankly and without delay how the transaction will alter their work.
Third, the M&A announcement should clearly link the finances of the transaction with plans for integration of the companies, Sirower said.
“Markets hate one fat synergy number,” he said, adding that deal-makers need to describe the sources of synergy – whether from marketing, accounting, finance or other areas. “If you don’t, then what are you putting in your valuation model?”
Deal-makers should also keep in mind what not to do on Announcement Day, Sirower said.
“Don’t signal you have no plan” by, for example, putting “the synergy page on page 23 of your investor presentation when you’re paying a significant premium” for the acquisition.
“We counsel executives to treat capital like it’s luxurious, it’s expensive to touch,” Sirower said, noting that during the signing of an M&A agreement, “assumptions become promises.”