Establishing beachheads in new countries, acquiring businesses rather than building them, vying for access to trade blocs, corporations continue to seek growth through cross-border mergers. Adding fuel to the fire, the Asian crisis has spurred a new round of deals, as companies formerly resistant to overtures are now desperate for capital.
Unlike the early 1990s, the number of non-US firms acquiring US ones now outweighs stateside players buying up companies around the globe. Look at the blockbuster deals so far this year: BP and Amoco, Daimler and Chrysler, Pearson and Simon & Schuster, Bertelsmann and Random House.
If you haven’t already dealt with a cross-border transaction, chances are you will. The IRO, management’s mouthpiece to the investment community, must articulate the merits of the deal to analysts and portfolio managers. However, because of the secretive nature of cross-border deals, the IRO may not be brought in early enough to deliver the strategic message effectively. More likely than not, lawyers and investment bankers, working behind closed doors to avoid leaks, don’t want you involved until the end of negotiations.
‘If rumors leak too early, the impact on the stock price of the target and the acquirer can make reaching a deal impossible,’ says Richard Pollack of law firm Sullivan & Cromwell in New York. ‘It is critical for acquirers to maintain extremely tight controls over who has access to information and to make sure that all members of the team understand the sensitivities.’
Early start
How, then, can you get in early enough to do your job effectively? According to Charlotte Laurent-Ottomane, head of IR at France’s Alcatel, which recently acquired US-based DSC Communications for $4.4 bn, effective IROs must have a close relationship with management. ‘IROs must be involved because communicators need to understand the big picture and direction of the company in order to communicate with the market,’ she says. Also, she points out that the feedback the IRO gets from investors can provide an invaluable source for management to understand and try to meet market expectations. ‘It is essential to be involved in any deal with hands-on knowledge in order to complete the circle between management objectives and market expectations.’
Prepare by educating yourself on the issues involved. Cross-border deals are extremely difficult from a legal, regulatory and communications standpoint. The ‘team’ will respect its ‘informed’ members. And that entails a general understanding of what the lawyers and bankers are up against.
The legal team has a Herculean task. While the European Commission recently revived its move toward creating a regulatory body to govern all European members, currently each nation has its own set of securities regulations. Both the host and target companies must find common legal ground for the deal while simultaneously being sensitive to potential antitrust violations.
Many nations have new antitrust statutes on their books and, armed with new tools to assess the deal’s global market impact, they seem eager to test them out. Some members of the team will focus on the agendas of regulators here and abroad.
‘It is critically important that the positions the acquirer takes in its public statements are consistent with the positions it is taking in other contexts,’ adds Pollack. ‘We often see IR people propose public statements to the effect that the acquisition will give the acquirer a dominant market position; but at the same time scores of lawyers and economists are meeting with antitrust regulators in various jurisdictions trying to convince them that the acquisition is pro-competitive.’
Understand the scope of the initial agreement. Pre-acquisition agreements are more important than ever as companies begin to share confidential information. Differences in the legal treatment of such agreements in the host and target countries must be clarified. The legal team should explain to you the nature of the initial agreement and what that means to your ability to communicate. Find out if there are non-disclosure agreements or standstill provisions in any confidentiality agreement. If there is a letter of intent, find out exactly what it binds both companies to.
‘Failure to respect the SEC rules about what can be said and when can easily kill a deal,’ says Pollack. Announcing an intent to launch a tender or exchange offer triggers the prohibitions on most purchases of stock outside of the tender offer or exchange offer. ‘This can prevent an acquirer from being able to negotiate an agreement with a substantial shareholder, for example, where it might otherwise have been able to do so.’
More importantly, Pollack points out that when the acquirer intends to issue securities as part of the transaction, publicity prior to the filing of the registration statement with the SEC can constitute ‘gun jumping’ and force a delay in the process.
Consistent no comment
>Be consistent with your ‘no comment’ policy. As in domestic deals, Niri recommends a policy of not responding to market rumors. To maintain a consistent ‘no comment’ policy, an IRO should not comment on groundless rumors and then issue a ‘no comment’ statement when deals are actually going on. Says Niri’s Standards and Guidance for Disclosure: ‘It is an inconsistent use of a ‘no comment’ policy to say, There are no significant corporate developments at this time, when such is the case, but respond, No comment when M&A developments are under consideration.’
Focus on differences in accounting standards, labor laws, environmental regulations, and norms governing business practice. With variations in accounting rules from country to country, even within the EU, there is wide latitude to define valuation criteria. As the interpreter of the deal to the investment community, you must be armed with the tools that analysts and investors will need to make their own assessments about the deal.
Internally, get answers to the questions you’ll be asked. Find out if there are any potential challenges in corporate structure, employees, worker job security, customer expectations and national culture. Which products and services will be offered? Will the merger result in savings or revenue growth? Who will run the combined business? Who will be in charge of each of the facilities or groups? Where will the expected cost savings come from? And stress the strategic logic of the deal. Why are we a better parent for this company than someone else? How will we be able to create more value after the deal?
The emotionally-charged atmosphere of a merger works against objectivity. Carefully develop a framework that addresses the key questions and stick to that framework in evaluating the communications plan even when seemingly inevitable strains arise.
Get to know the shareholders of the acquired company, even if you can’t immediately communicate with them. Research departments in sophisticated IR firms can conduct predictive analysis to determine whether holders of the acquired company will retain their shares of the new entity or sell. Knowing what might happen helps the company prepare a more informed communications plan.
Unfortunately, after all this preparation, IROs may have to hold their tongues even after the deal has been announced. ‘This depends on the structure of the transaction, as well as business considerations,’ says Pollack. ‘Until a registration statement is filed with the SEC, publicity must be severely limited.’
He also notes that acquiring a US public company necessitates adherence to additional SEC rules beyond those that govern ADRs. For example, an acquirer may not end up owning 100 percent of the target if it has public debt outstanding. That means the acquirer may have to continue to file reports under SEC rules, may still have local stock exchange listings, must respect state law requirements on what it does with the minority holders, and so on.
Reach out to your counterpart. Dealing with the other IRO can be highly profitable. Laurent-Ottomane suggests a delicate approach, as the IRO is already probably feeling a bit displaced. ‘Ask nicely for shareholder information from them,’ she says. Consider working with this individual, retaining them as the contact in the new market.
‘You can’t just have a major presence in another market and ignore shareholders there,’ says Laurent-Ottomane. ‘If you don’t have an IR consultant in the foreign market, you should consider one.’ She strongly advises, however, that you don’t allow IR consultants to speak for the company, especially in light of the sensitivities of cross-border deals. ‘It degrades the IR communications process,’ she says.
Morgan Molthrop is director of IR at Georgeson & Co in New York.
