Adding value to share price during M&A: A bit of effort will reap rewards

By Carlos Keener, Founding Partner, BTD Consulting

Carlos Keener, Founding Partner, BTD Consulting
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.