By Carlos Keener, Founding Partner, BTD Consulting
Those leading on M&A have to emulate the very best of the circus plate-spinners, keeping lots of lots of different aspects of the M&A process alive at the same time, and not letting any crash to the ground. One of the plates that needs to be looked after carefully is share price.
Share price value will generally increase following a merger or acquisition provided the market believes the deal delivers a more profitable business. Everyone intends their M&A to add value, and if they buy and integrate well, it will. But share price can be a tricky plate to keep spinning. It isn’t enough just to tweak it from time to time. Take your eye off it for a moment and it could teeter beyond retrieval, crashing to the floor and shattering all hopes of a successful life post-merger.
Prevent share price drop on merger announcement
There is a well observed tendency for the share price of the acquiring business to drop on deal announcement, especially if the acquirer has paid a premium and fails to convince the market of their ability to more than recover this through integration and improvements post-close. It isn’t always easy to avoid and sometimes the markets will do what they do despite your very best intentions and actions.
But you don’t have to be complicit in this by making unhelpful decisions. One of the first public facing things that happen around a deal is the announcement it is taking place. Great care should be exercised with this. A word out of place could cost a huge percentage share price fall.
For example, announcing the $19bn acquisition of WhatsApp in February 2014, Facebook’s Mark Zuckerberg said “WhatsApp is on a path to connect one billion people. The services that reach that milestone are all incredibly valuable. I’ve known Jan [Koum, founder and CEO] for a long time and I’m excited to partner with him and his team to make the world more open and connected.” On releasing this announcement, Facebook’s share price immediately dropped 3.4%, instantly wiping close to $6 billion off their value.
It is entirely likely that the market wasn’t convinced that a personal endorsement from Zuckerberg was enough to justify the deal. The markets wanted something more concreate in the announcement – such as a conviction that the deal was going to really benefit Facebook – and how that benefit would be made visible. The market wanted something to justify investment – and a personal character endorsement isn’t enough.
Here’s an example of an announcement that bolstered share price.
Announcing the acquisition of Dresden Papier in March 2013, the CEO of Glatfelter, a mid-cap manufacturing firm with revenues at the time of $1.7 billion, stated, “The acquisition of Dresden Papier will add another industry-leading nonwovens product line to our Composite Fibers business, and broaden our relationship with leading producers of consumer and industrial products. Despite the ongoing economic challenges in parts of Europe, we believe the global nonwoven wallpaper business will continue to grow at a compound annual growth rate of at least 10%. This acquisition will also provide additional operational leverage and growth opportunities for Glatfelter globally, particularly in large markets such as Russia and China, and other developing markets in eastern Europe and Asia.”
Share price immediately increased by a staggering 28% – and went on to rise by a further 29% in the coming months as integration progressed.
Communicate often, and communicate well: trust the specialists
Getting the initial announcement right is the first example of what needs to continue in order to maintain – or better, increase – share price as the merger process is worked through. The golden phrase here is ‘communicate often, and communicate well: trust the specialists’.
Both shareholders and markets want to know that things are going well – and they are not clairvoyant. You need to tell them, regularly. It is remarkably easy to lose track of this imperative when you are deep in the mechanics of the M&A process. But you really can’t let yourself lose sight of it.
Getting the message across requires skill and dexterity. Many people think they have a novel in them, and there are plenty of poorly written, self-published novels out there that disprove this belief. Similarly, lots of people think they know how to communicate well around M&A, believing they have the specialist skills needed to deliver nuanced messages to markets, shareholders, investors and the general media.
But even within the field of communications specialists, there are sub-specialisms, and working with key stakeholder groups around M&A is one of these. Unless your organisation is involved in serial M&A and retains staff specifically for that purpose, it is unlikely the specialist skillset required will be in house. So look externally for it, buy it in, and use it well. It will pay you back.
Respect the market
The market, shareholders and investors, will make or break your share price. They can be a fickle bunch, and won’t always react to the information you feed them with as you might expect. But just as it is a fallacy to stop communicating with them, it is also unwise to hide what you might think is negative news from them because you think it will harm share price.
If a certain aspect of the M&A is going less well than you thought it would, think about how you will communicate that. Perhaps technology integration is more complex than you’d thought, and you have to go back to the drawing board. There will be sound reasons for that, and you can find a way to share these, and explain how a little unexpected pain now will reap rewards later on. The worst thing is to try to hide news like this. Stakeholders will find out, and if news comes out unofficially, there may be all kinds of damaging speculation around it.
The very last thing you want to do if you are concerned about share price is firefight bad news. You need to be on the front foot all the time, and taking the initiative in explaining delays or changes of direction can keep you on the front foot.
A key part of taking the right course of action when reporting delays is maintaining credibility. Even if a particular announcement results in a fall in share price, when the announcement itself is handled well, by skilled communicators, you can retain, and even increase, the degree of respect stakeholders have in the M&A, buoying up your credibility in the face of adversity. The longer term benefit of building trust with stakeholders can’t be underestimated.
Prepare for the bad times
The M&A that goes smooth as silk from start to finish is a rare thing indeed. There are always going to be glitches of some kind or another. It can be extremely helpful to build in to the risk management process regular reviews specifically designed to highlight potential issues in the coming period with a special focus on how you will communicate these. Preparing strategies or statements you may never use is not wasted time. If nothing else, it might help you think better on your feet if you have to, and at best it will mean you are better prepared and more confident when you need to be.
One of the things that can damage share price is the departure of key personnel. People who were perhaps architects of the M&A, or who were seen as being vital to the success of the new business that will come out at the other end of the process. If such people leave the organisation, a good deal of mitigation may be needed to prevent a fall in share price. How will you handle the departure of your CEO, CFO, CTO, or other board level personnel? Preparation could stand your share price in good stead.
There are other areas where some forward planningmight help. Where two organisations are combining plant, manufacturing facilities or overlapping staff roles, there may inevitably be some staff losses. This might mean one city or geography suffering more than others. How will you handle that both early on in the process and when the reality starts to bite?
Create, maintain and build stakeholder confidence
In the end all of this advice boils down to creating, maintaining and building stakeholder confidence through strong, regular and honest communication.
There will always be things in the markets that are beyond your control, and that can drag share price down. But there will be many things you can control, through careful planning, building a strong and capable team of communicators, listening to advice from M&A specialists, and always understanding that you need to take the markets, shareholders and other stakeholders with you on the M&A journey.
Business recovery from COVID-19 lies in implementing the practice of Open Book Management
By Suranga Herath is CEO of English Tea Shop, the leading independent speciality and organic tea company.
Over the course of the last few months, most businesses have been forced to adapt their strategy against the backdrop of the pandemic. For many companies, business growth and development slowed and certain key goals and innovations fell to the wayside in order to prioritise ‘survival’.
For my business – a speciality tea company – we place great emphasis on exporting across the globe and bringing people together to enjoy a cup of tea as part of a wider community. Neither of those things have been possible amidst the pandemic. Whilst this was initially difficult for us, we are now steadily transforming our business to function in the new world order and our business model of Creating Shared Value is instrumental in making this happen. This has not only brought us closer with our suppliers and customers during this challenging time, but also through the practice of Open Book Management (OBM) we have been able to navigate this time united and focussed. OBM fosters a unique culture of employee and stakeholder transparency, empowerment, and satisfaction; in turn leading to incredible results, loyalty and increased productivity across the board.
So as we start adjusting to the new normal, I wanted to share a couple of reflections that I believe has made a fundamental difference during this challenging time. My firm belief is that whilst the road to recovery will be a long process for any business, it is through implementing initiatives like the Open Book Management that businesses from all sectors can put their best foot forward as we enter the new normal.
Open Book Management – a definition
Open-book management (OBM) is the business practice of creating transparency through sharing financial information with employees across the company. The power of its implementation lies beyond just the practical means, as the philosophy and theory carry profound ripple effect across the entire organisation and culture. Whilst for many leaders the idea of sharing financial information with employees beyond the senior management team seems alien, the benefits reaped are worth the effort.
Open Book Management (OBM) is a system that incorporates this financial transparency alongside providing teaching, KPIs and bonus systems for employees, as well as Employee Share Ownership Program (ESOP) which gives staff a percentage of the company shares. The idea behind this is that when employees gain a better understanding of how the organisation is run, they become empowered by this knowledge and become more committed to the company and its results.
This is not necessarily limited to employees, and is often extended to stakeholders; in fact, at English Tea Shop we have been equally transparent with our community of organic farmers, reaching out to them during Covid to be transparent around our cash flow and assure them in their role as suppliers.
Road to Recovery
Regardless of industry, size or previous growth, any business leader will admit that the recovery from prolonged socio and economic disruption like the COVID-19 pandemic is a long and challenging process. Businesses that choose to shake up their traditional business models and embrace a more disruptive and progressive approach will experience a first mover advantage and put themselves in a good position for the long and hard battle ahead. In my view, initiatives like OBM and the Great Game of Business are the perfect starting point for any business that is looking to motivate its workforce through fostering a strong community and igniting entrepreneurial spirit.
Since inception, my goal for English Tea Shop has always been to build a business of dedicated people with sustainability as our guiding force. Our model of Creating Shared Value is focused on creating win-win situations whilst finding opportunities for growth in sustainable development. All whilst looking after our Prajava (Sri Lankan word for community).
Over the last couple of years we’ve grown substantially, whilst keeping a happy and motivated workforce. This has resulted in numerous awards wins. But perhaps the biggest measurable achievement to date is the 31% improvement of productivity across our factories in just under 12 months. This came about organically without any further investment towards new technology or systems during that period.
From a business perspective, this meant we had increased capacity to do more, and reach a wider audience. It also helped us win a host of prestigious awards for Sustainability, such as the Queen’s Award, National Business Award, Gold awards at Sri Lanka’s National Productivity Awards and many others. Just this month, we were awarded the “The Great Game of Business All-Star” for our commitment to generating results through integrating Open Book Management within the Creating Shared Value business model.
Even during the most difficult years, such as Brexit, we were able to keep our head high and remain profitable despite the numerous external challenges, and this was because everyone worked towards a commonly shared goal and had a high level of accountability in terms of their individual actions; no matter how little they believe them to affect the bigger picture. This is the magic of OBM.
While for my business and many alike financials have been strong, the most profound impact of OBM lies on the level of understanding it fosters greater understanding of business. When everyone started thinking and acting like commercially-minded business people they understood challenges better, and they applied their knowledge and skills much better. Hence, we are confident of a long-term approach that will make us a uniquely sustainable business.
From my perspective, there is nothing more powerful than a business driven by entrepreneurially minded employees, that understand how their role plays a part in the bigger picture and strategy of the business. This is exactly the type of mindset and culture that OBM fosters, and embedded across the entire organisation, and if our results are anything to go by the potential is endless.
I urge other businesses to take stock of their current operations and means of growth, and look beyond the traditional strategies as it is through progressive approaches like OBM that the combination of business growth and employee satisfaction can be achieved.
And with more uncertainty heading our way, now is the time to start.
The Impact of Covid-19 on Planning
By Nilly Essaides, Sherri Liao and Gilles Bonelli, The Hackett Group
The economic consequences of the coronavirus outbreak vary by country and company, but one common factor is that most financial planning and analysis (FP&A) teams have had to go back to the drawing board to revise their forecasting process and update scenario plans. The unprecedented level of disruption in business conditions compels FP&A to abandon their traditional, tedious, bottom-up forecasting processes to produce forward-looking insights faster and more frequently. To accomplish this, FP&A should deploy high-level, cross-functional teams that, by working with a small number of KPIs, can assess how different scenarios are playing out in the market and recalibrate the business outlook.
Forecasting at the speed of change
The human and economic devastation caused by the rapid spread of Covid-19 upended budgets and rendered performance targets obsolete. At most companies, even worst-case scenarios did not account for an event of this magnitude – and for some, their very survival is on the line.
Under normal conditions, forecasting and scenario planning are distinct activities. Forecasting is about understanding where the business is landing compared to expectations (monthly, quarterly or on a rolling basis); scenario planning considers what could happen to the organization given one or more material changes in the business environment. At present, the line between the two is blurring as circumstances can change so fast that it is no longer possible to create a forecast based on past data. In addition, scenario plans must be reviewed frequently to ascertain which are becoming more likely.
Consequently, FP&A teams must exchange their traditional bottom-up, granular approach with a top-down, high-level methodology and conduct the forecast more frequently – but few are set up to accommodate this new process. More often, forecasting involves an all-consuming effort to collect data from business units and functions. To enable a more rapid response, FP&A should assemble a senior-level, cross-functional “SWAT” team with the mandate to review a limited number of KPIs (five to six, at most) in order to build a forecast that can be altered quickly as trigger events validate or disprove scenario plans.
This small team of experts can triage activities effectively while assigning specific areas of responsibility to more junior staff, such as forecasting working capital or discretionary spending. These specialists should work with a set of more granular KPIs. So, while the SWAT team may use a single cash metric, the working-capital team would dive deeper into DSO, DPO and inventory levels.
The first step is to alter the forecasting process, and the next is to adjust the feedback loop created through the management review meeting. Typically, these meetings focus mostly on BU-by-BU, actual-to-forecast and actual-to-budget variance analysis, using historical data. However, for many organizations – particularly those that have experienced a major reset of market demand and ongoing operations – spending time looking back at low-level comparative narratives is unproductive.
Instead, management should spend the bulk of its time reviewing the company’s best-case, minimum-viability and worst-case scenarios to determine which one seems to be playing out. To make sure planners target the right activities, management must ask the right questions: not how the company performed versus budget, but how conditions have changed and how that affects the forecast for emerging supply and demand scenarios.
A revised approach to identifying scenarios
For planning purposes, most companies develop three scenarios: base, best and worst. Given the nature of the Covid-19 crisis, a revised set of scenarios is needed:
- Best-case scenario: The best-case scenario should be anchored within tested hypotheses and initially focus on an assessment of demand conditions and capacity constraints. Current data may be mostly qualitative, but it should include insights gleaned from other countries and regions, particularly those exhibiting early signs of recovery.
- Minimum-viability scenario: This is the “new” base for companies hard-hit by the crisis or the scenario with minimum acceptable results to key stakeholders while remaining in business. This scenario must include a set of potential cost-reduction options in case conditions deteriorate rapidly. For instance, a minimum-viability scenario may include an X% reduction in workforce based on demand and supply projections.
- Worst-case scenario: The coronavirus pandemic may pose an existential risk to some organizations, so FP&A teams must also develop a scenario based on the worst possible conditions, including circumstances that may put the company out of business. In this case, FP&A should identify and monitor indicators that pose the greatest threat to the company’s status as a going concern.
Digging deeper into each scenario
Each key market or country or region should be categorized according to a variety of possible GDP growth scenarios.
A U-shaped recovery assumes the fastest rebound in key countries where GDP quickly reaches or nears pre-Covid-19 levels. These will be geographies where evidence of fast, effective control of the virus’s spread is combined with a strong policy response to prevent structural damage to the area’s economy.
A W-shaped recovery assumes a quick, partial recovery followed by a second wave decline in GDP in key countries or regions. These will be cases where evidence of fast, effective control of the virus’s spread is not accompanied by a strong policy response to prevent structural damage to the national economy.
An L-shaped recovery assumes that there will be no rebound in GDP. These will be countries or regions where there is no evidence of effective control of the virus’s spread.
The team should identify specific actions to be taken under each scenario so that management can act as economic conditions unfold. Additionally, FP&A must determine how changes in the environment may affect the company’s commercial and SG&A functions. Further, the trajectory of GDP will vary, driven by the public health and economic response of each country or region. Both inputs will be critical as companies determine how to proceed.
Due to the interdependence of different markets, it is important to consider elements of each in the entire strategic portfolio’s value chain. If a component of the value chain in any strategic portfolio is reliant on activities taking place in countries where a U-shape recovery is expected, then this component should attract more investment compared to those in countries where a slower recovery is likely.
If a component of the value chain in any strategic portfolio is reliant on activities taking place in countries where a W-shape recovery is expected, then investment in this component should be maintained. Accordingly, if a component of the value chain is directed to markets in countries where an L-shape recovery is expected, consider gradually divesting from the portfolio and phasing out related activities.
A catalyst for change
Covid-19 has underscored the discrepancy in planning and analytics capability between top-performing and typical peer-group FP&A organizations. The Hackett Group’s 2018 EPM Performance Study revealed that top-performing FP&A organizations have invested more in technology, which has enabled them to run more analysis and deliver reporting faster and more efficiently. Of top performers, 67% have implemented a primary financial planning and forecasting system to consolidate corporate and country, region or BU information.
Consequently, top-performing teams complete the forecast 3.5 times faster than the peer group and are twice as accurate. These capabilities are essential, as FP&A must provide information more quickly to help make operational decisions. Further, top performers have automated more of their data collection processes and use a standard set of data definitions across categories 92% of the time. This means their staff spend 44% more time analyzing data than collecting it, meaning that the team can redirect capacity to focus on Covid-19-driven demands for information and analysis.
While adoption of rolling forecasts remains generally low, top performers are 55% more likely to have done so than the peer group. Consequently, they can transition more easily from a fixed budget to planning based on a dynamic forecast. Additionally, one-third of forecasts among this group already rely on cross-functional collaboration, almost double the rate of the peer group.
Planning in the age of Covid-19
The coronavirus pandemic’s immediate and long-term repercussions will have a lasting effect on the way organizations plan and forecast, as well as how they approach scenario analysis. Early in the crisis, most FP&A teams had to scramble to adjust forecasting cadence, redraw scenarios, identify new KPIs and establish cross-functional emergency action teams. In contrast, FP&A top performers were able to adjust their existing processes relatively easily.
As companies start to shift from crisis mode to operationalizing changes required by the pandemic, post-crisis scenarios are starting to take shape. Expectations are for a prolonged period of uncertainty and a second wave of infections this fall, however, which makes it imperative that FP&A organizations update their approach to scenario planning immediately.
Covid-19 can reboot belt and road initiative towards a sustainable future
- A new CMS report reveals that Covid-19 has boosted Chinese enthusiasm for adopting the principles of BRI 2.0, leading to an increased focus on sustainable and environmentally friendly projects such as smart cities and renewables & hydro
- The appetite for an improved ‘Health Silk Road’ has significantly increased among the majority of both international and Chinese senior executives involved in BRI
- Meanwhile, the research uncovers a clear mismatch in sentiment between Chinese and non-Chinese towards BRI and the success of projects
As global economies strive to build back better and greener from the global pandemic, global law firm CMS’s 2020 Belt and Road Initiative report reveals that the pandemic has boosted Chinese enthusiasm for adopting the principles of BRI 2.0, which will pivot it towards an environmentally friendly future.
BRI 2.0 is a new phase of BRI intended to encourage international involvement, which was announced in April 2019 by President Xi Jinping at the second Belt and Road Forum for International Cooperation in Beijing.
The study was conducted in partnership with global research firm Acuris and TianTong Law Firm and included a major survey of 500 senior executives from both Chinese and international participants in BRI projects. Their views were sought on a range of issues around BRI, including likely future involvement and obstacles they have encountered to date.
Increased enthusiasm for sustainable projects
The research found that nearly two-thirds of both Chinese (63%) and international (62%) executives agree that it is important that their BRI projects should be sustainable and environmentally friendly. Furthermore, the majority (84%) of Chinese respondents believe that sustainability and environmental considerations will be given greater importance when planning and completing BRI 2.0 projects.
Enthusiasm remains for traditional sectors like logistics, roads and rail, and now, particularly among Chinese executives, there is growing interest in relatively new sectors like energy networks and power grids, smart cities and renewables & hydro. For international respondents, the emphasis on sustainable projects is also increasing, with only a handful (13%) previously involved in renewables and hydro but nearly three times as many (34%) planning to target the sector for future opportunities.
Importantly, CMS’s research reveals that Covid-19 has given a boost to the ‘Health Silk Road’, which aims to increase medical infrastructure and public health in BRI countries. Nearly all the international executives (93%) and 85% of Chinese respondents see Covid-19 as a major catalyst for it.
Munir Hassan, Head of CMS Energy Group, said: “It’s clear that interest in more ‘modern’ and sustainable sectors, such as smart cities, healthcare and renewables has increased in significance. Renewables projects typically require less capital commitment, are quicker to complete and are likely to be judged at lower risk, which will be attractive to international and Chinese participants. As efforts to limit climate change intensify, there will be a major role for BRI investments to play.”
Mismatch between Chinese and non-Chinese views
The research reveals that general sentiment towards BRI has declined in the last 12 months and one reason for this is geopolitical uncertainty, particularly among international participants. The survey has also uncovered a clear mismatch between views of Chinese and international executives that are involved in BRI projects.
Over two-thirds (69%) of international respondents said they found the process of participating in BRI related projects more challenging than they had expected, compared to just 40% of Chinese respondents. Likewise, only 37% of international participants said they were satisfied with the process and outcome of their involvement, compared to the majority (75%) of Chinese equivalents.
International participants have experienced difficulty with transparency, information flow and equality in partnerships and for many, this had impacted their view of BRI. But there are signs that more projects are now being structured to accommodate these concerns providing attractive opportunities for those international participants still keen on BRI involvement.
Regarding future partnerships / JVs, Chinese respondents are more enthusiastic than non-Chinese, with 77% likely to consider them, compared to just under half of non-Chinese (48%).
Munir Hassan added: “A key area of growth is likely to lie in projects that meet the trends of the future. Affordable projects, embracing modern technologies and methods, as well as the “open, green and clean” approach of BRI 2.0, will be those that stand the greatest chance of success.”
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