Capital Allocation Series: M&A
Part 2 of 2: Acquisition Communication Journey
In today’s Thought Leadership, we’ll be covering the second part of our two-part Capital Allocation Series exploring all things M&A, including investment community preferences, corporate issuer trends, as well as best practices.
As our valued clients, you are receiving an advanced read of these insights before our M&A White Paper is released later this summer, which will be chock-full of recommendations and best-in-class examples.
Setting the Stage
Last week, we explored broad-based and company-specific investor preferences for capital deployment, the importance of understanding your company’s M&A archetype, and the necessity of robust strategic communications to build investor confidence in M&A prowess. Additionally, we discussed key strategic and financial criteria that top acquirers communicate to frame and benchmark M&A success, particularly the critical role of Strategic Fit in driving positive investor perceptions and buy-in.
In case you missed it, you can access our Thought Leadership Part 1: Pre-Work is the Key Work
This week, we’ll be discussing everything from announcement to post-completion communications, examining common corporate issuer practices and what institutional investors and analysts expect throughout the journey.
According to our proprietary buy-side research spanning 16+ years and more than 22,500 Voice of Investor® (VOI) interviews, the largest disparities between companies that score in the top quartile of our Corbin Analytics database and the broader Corbin Universe amongst normative M&A benchmarks predominantly relate to post-announcement elements. Specifically, while we already established top quartile companies, on average, excel the most in Strategic Fit, they also demonstrate significant prowess in Integration Success and Synergy Realization (both cost and revenue). In other words, it starts with strategy and expectations management, and follows through with execution.
In fact, when looking at the variance of the data across these three M&A benchmarks, interesting insights emerge.
Integration Success receives the widest variance among the M&A normative benchmarks, meaning companies within our Corbin Analytics database experience the largest dispersion of investment community perception of performance in this area. Furthermore, Cost and Revenue Synergies, when applicable, prove the most difficult to garner appreciation for, as evidenced by the lowest medians of all benchmarks (denoted by the vertical line within each box).
In our experience, excellence in these areas is closely linked to how well companies manage expectations — both before and throughout the M&A journey, including on integration and synergy capture — based on effective and proactive communication.
With this understanding, the following analyses delve into best practice communication elements once an M&A announcement is made and how to properly manage expectations to build maximum credibility and mitigate risk throughout the acquisition communication journey.
Methodology
Investor Perspectives
To provide the Street’s view, we surveyed1 75 global investment community professionals about their M&A communication preferences and mined the Corbin Analytics database.
Corporate Practices
To identify and evaluate common M&A communication practices, we also conducted bespoke research on a randomized sample of 30 companies with market caps greater than $1B and acquisitions of at least $1B in deal value (with a range of $1.2B to $25.2B) whose transactions were completed in 2022-2023, with an emphasis on analyzing announcement and post-completion communications. Acquirers represent a diverse range of market caps and sectors, and the average time between transaction announcement and close was ~4.5 months, with a range of 1 to 10 months. Of note, 50% of transactions represent public-to-public-company deals.
Acquisition Communication Journey
Sticking the Landing
As the saying goes, first impressions matter, and it all starts with the M&A announcement. Sticking the landing is crucial to managing investor expectations and setting the stage for successful execution.
Announcement Press Release
The press release announcing a transaction is the first line of defense — it’s consumed immediately and its contents shape perceptions just as quickly. Tone and transparency matter meaningfully and can serve as a significant factor in building or eroding management credibility.
As we reported in Part 1, companies should be communicating a capital allocation framework replete with priorities. And if M&A is a focus, it’s best practice to outline strategic and financial criteria, as acquisitions are generally better received when the transaction fits with the previously communicated framework. The press release should, in large part, mirror the M&A framework that is being regularly communicated throughout investment community materials and address the rationale through the lens of strategic and financial benefits.
Further, it is crucial to “own” the transaction. Very few deals check all the boxes and even fewer are going to appeal to everyone all at once. Avoid pulling the wool over investors’ eyes — they will see right through it. Rather, communicate robustly and transparently. Whether you include information or not in the press release, you will get asked about it in subsequent, private conversations. By leveraging your first line of defense — the press release — and deploying best practices that are aligned with investor expectations, you have the ability to control the narrative and neutralize skepticism proactively.
Strategic and Financial Benefits
In an analysis of transaction press releases, extends customer/market reach, improves market positioning, and aligns with core business are the most oft-cited strategic elements, while premium paid, EPS accretion, and cost synergies the most common financial elements. Outside of premium paid, the most frequently cited strategic and financial elements included in the press release do, in fact, reflect leading M&A framework measures discussed in Part 1 of our M&A series.
Dedicated Webcast and Supporting Materials
As we outlined last week, outside of a financially material 3 acquisition, the investment community asserts acquisitions signaling a significant shift in strategy or those outside of the core business (i.e., transformational) are the most prevalent situations warranting more robust communications such as a dedicated webcast with prepared remarks, presentation, and Q&A.
Of the companies analyzed, 70% produced a dedicated presentation outlining the strategic and financial elements of the deal, and 57% elected to host a dedicated webcast. Calls averaged 44 minutes (with a range of 23 to 76 minutes), and included participation from the acquiring company CFO, CEO, and IR leader, though 29% also involved group presidents. Just under half, 47%, also included the target company CEO as a participant on the call.
To that end, companies received an average of 14 questions throughout the call, with follow-ups predominantly relating to the new growth outlook and opportunity and portfolio/asset mix. Notably, over three-quarters also received questions regarding their overarching M&A strategy, with queries ranging from appetite for additional deals to overall capital allocation framework implications.
Following Through
As mentioned, effective expectations management doesn’t end with the announcement; it involves following through with strategic communications as an integral part of investment community events and materials for many subsequent periods, including well beyond the completion announcement.
Subsequent Earnings Communication and Beyond
As a part of the earnings period immediately following an acquisition announcement, 83% of companies included a more pinpointed callout of the acquisition within the earnings press release beyond basic financial impacts (i.e., integration costs, financing mechanisms, etc.). Of this group, 76% mentioned the acquisition briefly, such as within a quarterly highlight bullet at the top of the press release or within the CEO quote, though 28% went so far as to create a dedicated section reminding the investment community of the strategic and financial elements of the deal, which is best practice.
Further, of the companies that produced an earnings presentation along with their results, 64% dedicated at least one slide to the acquisition. On the subsequent earnings call itself, companies received an average of two acquisition-related questions from analysts.
As it relates to earnings communications more broadly following the closing of an acquisition4, our analysis reveals companies provided relevant acquisition updates as a part of the prepared remarks section for an average of four subsequent earnings calls before the updates were fully integrated into the overall growth narrative.
The most common topics discussed over this timeframe included a mix of both reiterating the strategic elements and rationale of the deal, such as market position/scale benefits and TAM/market expansion, and tactical updates such as integration progress, target company demand/volume trends, and any realized or projected financial puts and takes.
Adjusted Financials
In the scenario where there is sizable amortization of intangible assets, the majority of surveyed investors and analyst, 60%, are in favor of adjusting EPS to exclude it, owing to the belief that amortization is not a useful economic cost and adjusting helps provide a clearer picture of cash flow. Of the companies analyzed, more than half, 53%, adjusted their EPS figure accordingly.
Selected Investment Community Commentary:
“Most companies do adjust that out. I tend to focus more on free cash flow. So, in that sense, it kind of adjusts out in the free cash flow anyway. For the most part, I would adjust for that for very material acquisitions.”
Buy Side, $112B EAUM
“As long as it reflects the way the management team is managing the business, I am in favor of them adjusting that out.”
Buy Side, $110B EAUM
“I am in favor of them moving to an EPS number that adjusts that out, more so in Tech than other places, but that is normal. I like apples-to-apples comparisons in terms of adjusted EPS. Netting it out works.”
Buy Side, $65.7B EAUM
“It’s certainly a consideration because ultimately you want to get a sense of the cash flow as opposed to just the accounting elements. You want to understand the dynamics of what’s driving that amortization within the financials, but if you’re looking at it on an EBITDA basis, then that should be stripping that out. I don’t necessarily know that you’re going to some other kind of metric, but some disclosure around the cash impact is useful.”
Buy Side, $24.3B EAUM
“I generally like closer to GAAP. I hate restructuring add-backs and things like that, but certainly amortization is not a useful economic cost. Honestly, inventory step-ups and things like that are also confusing, so unless you add them back in the first quarter or two, the acquisition can be confusing.”
Sell Side
Heading to the Championship
Recognizing each acquisition brings a different slate of information to message — and some are harrier than others — there are clear best practices for communicating with the Street once the deal has closed to mitigate risk and maximize value ascribed.
- Provide Regular Updates on Earnings Calls: Maintaining investor confidence requires consistent communication and reinforcement of execution proof points. And when it comes to shareholder capital stewarded to M&A, overcommunication is key. Regularly providing updates post close on earnings calls in prepared remarks and supported by proof points in the supplemental presentation is crucial to educating investors and building confidence in your company’s acquisition acumen. Highlighting integration progress, cost synergies, revenue synergies, as well as other relevant accretion KPIs and/or benefits, keeps investors both informed and assured about the acquisition’s tangible contribution to the company.
- Leverage Cost Synergy Target as a KPI: While all deals are not rife with cost takeout, many are, and this can and has served as a meaningful way to build or reinforce credibility when communicated and executed correctly. Assuming cost synergies are material, a conservative target and timeframe (between 1 and 3 years) to achieve should be communicated in the initial transaction announcement. In all subsequent communications, be it earnings calls, one-on-ones, conferences, etc., the cost synergy target and progress to date should be highlighted. Visually depicting the total goal and watermark progress and timestamps in presentations is an ideal way of showing action. Provide regular updates on earnings calls and if able, communicate increases to the target at certain junctures — “As we have continued with our integration, we have identified an additional $10 million in cost takeout, bringing our total to $50 million, up from $40 million, of which we have captured $17 million in annualized run-rate savings.”
- Provide Examples of Revenue Synergies: As previously noted, revenue synergies are a less frequently quantified financial benefit as they are more difficult to capture in the integration process from a total perspective. That being said, growth is a critical element of acquisitions and companies can bring to light revenue synergies through case studies. Detailing several examples where revenue synergies are being captured within the business (singles and doubles, which add up) as part of the earnings call and/or investor presentation provides the “sausage making” proof points that investors need to gain confidence in delivering on the strategic and financial benefits.
- Craft an M&A Scorecard to Track and Communicate Success: Creating an M&A scorecard is a critical tool for tracking and communicating the success of past acquisitions. This scorecard should include both strategic and financial metrics to benchmark against, such as synergy realization, market expansion, and return on investment. Regularly updating and sharing this scorecard with the investment community serves to provide quantifiable evidence of acquisition performance, which helps in maintaining transparency while reiterating past achievements. Moreover, a well-crafted M&A scorecard allows companies to demonstrate how each acquisition aligns with their broader capital allocation framework
- Host an Investor Day within 12 Months of Closing a Material Acquisition: One key consideration is that material acquisitions present a prime opportunity to host an investor day or other like-minded investment community event (e.g., a “innovation/ technology day” or a “business segment/market overview” webcast). This dedicated event allows companies to communicate long-term strategy and company direction and how the acquired business is fitting into the mix, provide a deeper dive into the integration and benefits realized to date and opportunities ahead, as well as showcase added leadership who joined. As well, it’s an opportunity to refresh the capital allocation strategy and priorities, communicating whether all remains the same or priorities have shifted. These investor events serve as a forcing function for the leadership team to come together to crystallize thinking and the execution roadmap while telling your story when there is momentum and additional value creation opportunity ahead provides the Street with an investment catalyst.
In Closing
Building an M&A track record in the eyes of the Street is hardly a simple endeavor — it’s part communication, part execution.
We hope you’ve found the second part of our Capital Allocation Series on M&A insightful and practical. Whether you’re in your “pre-work” phase, attempting to “stick the landing” with an impending announcement, “following through” on your acquisition communications, or “heading to the championship” with the Street in your corner, we have a team of subject matter experts ready to support you every step of the way.
Thank you for your continued trust in us, and we look forward to hearing your feedback on this series!
- Survey timeframe: February – June 2024
- At time of announcement
- Defined as 10%+ of Revenue or EBITDA according to 83% of the surveyed investment community investors and analysts
- 80% of companies produced a transaction completion press release, while the remainder notified the investment community through 8-K only