As a journalist you get used to your calls being taken. People generally want to talk to someone who is going to write about them, particularly people whose job it is to communicate, communicate, communicate. This was not my experience on this story. Everyone I tried was either out or in a meeting or on another line. People who were meant to call me back did not, sometimes after leaving four or five messages.
In a sense, who can blame them? Who wants to speak to the press about such a blatantly painful experience? You spend months trying to convince the investment community, the regulators, the media, whoever else will listen, that this deal is the best thing since sliced bread, that it is essential to your strategy going forward and then something goes wrong. The regulators pull the plug or another suitor comes in with a higher bid or your suitor ditches you, claiming ‘the synergies of the deal no longer make sense’, or you simply get the jitters. How do you explain the failure to the investment community without sounding like a complete hypocrite? How do you reassure them that your company remains healthy with good prospects for growth?
Preparing for the worst
According to Owen Blicksilver, managing director of transactions and strategic communications (read crisis management) for New York-based Citigate Dewe Rogerson, it depends firstly on why the deal has failed and secondly on whether you are the acquirer or acquiree. ‘There is a big difference between a deal failing because the due diligence didn’t work out or the financing wasn’t there and, say, another acquirer coming in with a better bid. In the former, the deal is no longer going to make sense so that’s what you sell to the market. In the latter you could have a real confidence issue on your hands.’ Blicksilver continues: ‘Generally, as an acquirer you might have more problems explaining the failure because you were the one to seek out the deal in the first place. So you then have the job of really convincing the market of your strategic direction without the acquisition.’
Mark Hill, managing director of the London-based IR Group, says a company needs to start preparing for the collapse of a merger even before the bid for the other company becomes public. Sound pessimistic? Maybe, but Hill says it’s the key to softening the blow in the eventuality that everything falls apart. ‘Companies often don’t position the merger that well; they don’t explain properly how the deal is an extension of their existing strategy. If you plant the seeds about how the deal is embedded in your overall strategy, the ground won’t fall out from underneath you if it falls apart. It’s just part of a whole.’
Hill advises against taking anything for granted and says you should always have a plan B. Blicksilver agrees: ‘From the beginning of discussions you need to find the right balance between telling investors the deal makes strategic sense for the company and being aware it could come to an end for whatever reason. That’s easier in a hostile situation because it’s obvious; but even in a friendly deal you need to be aware.’
John Tysoe, a telecoms analyst at Panmure Gordon, also stresses the need to think about the possibility of failure at the very beginning of merger discussions. ‘We want to know why two companies are entering a merger and what it means for the direction of the businesses thereafter. So the possibility of collapse is a central part of those discussions,’ he says. ‘We want to know where they’re going to go next.’
Stormy skies
The one company that would talk, despite being in the middle of a results announcement, said it didn’t know what all the fuss was about. ‘It was a bog standard communications issue,’ commented British Airways’ investor relations officer, George Stinnes, talking about was the deal planned with Dutch airline KLM.
BA and KLM have a long history of could-have-beens. They first linked up in 1989-90 when both took stakes in Belgian airline Sabena. That deal fell apart when the Belgian government refused to meet the conditions set by BA and KLM. The second get-together, and the first attempt at an actual merger, came in 1991-2; but this time the deal faltered because of differing views on valuation as well as personality issues. KLM CEO Leo van Wijk famously commented, ‘It is business logic and the cultures between the companies that bring us together, rather than the personalities.’
With the difficult BA chairman Lord King long out of the picture, discussions were revived last summer. But they soon ran into regulatory and political problems, with the US government threatening to block the deal unless there was a breakthrough in the open skies negotiations with the UK. A bigger problem was the valuation of KLM and the consequent stake it would take in BA. ‘It really came down to an issue of control at the end of the day so the deal couldn’t go forward,’ comments Stinnes.
Shame about the deal…
He is very matter-of-fact about the way BA dealt with the fallout from the aborted deal. ‘We followed the same procedure that we would with any major announcement. The basic thing is that you need to communicate as quickly as possible with all your major audiences. You use the same tools as with other announcements. Having analyst meetings doesn’t really work because of the time frame but conference calls and webcasts are very important,’ explains Stinnes. He says that the investor relations and public relations teams worked very closely together. ‘You need to develop a set of key points explaining why the merger didn’t work out. In our case the central message was, Yes it is a shame it didn’t happen but we have x, y, z going for us on our own.’
Stinnes says that the investment community was – on balance – pretty accepting. ‘People were generally very constructive. Some obviously thought it was a shame because they could see enormous synergies between the two companies but they weren’t overly upset.’ In terms of the company’s share price, it initially went up but then fell steadily for a three or four week period. Stinnes stresses that you can’t necessarily attribute that to the collapse of the merger discussions. ‘There was a general slump in airlines at the time so everyone’s share price was plummeting.’ And, to be fair, on the back of solid results since then, BA’s share price has risen again.
But is the investment community always so forgiving? Christopher Dixon, an entertainment and media analyst with PaineWebber, says it very much depends on the specific reasons for the merger collapsing. ‘You have to look at the individual circumstances that have cleared a deal. If market conditions make a deal too difficult or regulatory issues get in the way, the company is probably better off not going ahead,’ he explains. Dixon says that there are usually two main reasons for a deal failing to happen: ‘Either shareholders think it is a bad idea so they sell their stock, putting pressure on the share price, which then makes the companies question the deal. Or the rationale for the merger changes because of ongoing negotiations or regulatory issues or whatever.’ He continues: ‘Regulators may postpone and postpone, and in the meantime the stock will go down and the new strategic rationale may be to abandon the deal.’
Easy-going investors
Dixon stresses the flexibility of the markets. ‘Mergers are no more than a way of doing a joint deal,’ he remarks. ‘An investor or analyst is not going to lose confidence in management if they have clearly articulated what their strategic rationale is. There is an acceptance among investors that strategy changes over time. If that means a deal doesn’t go ahead, so be it. If it’s the right thing to do, it’s the right thing to do.’
Citigate’s Owen Blicksilver agrees that the key issue is whether a company can clearly outline its strategic direction without the acquisition. But he stresses that management’s strategy will be judged over time and, if the company fails to deliver, the investment community can be punishing. ‘It’s a totally reasonable standpoint for management to say, for instance, We don’t want to do this deal because we can deliver better on our own. But the longer it takes to deliver, the more shareholders are going to be asking questions.’ Blicksilver says this is particularly true in cases where management egos come into play. ‘From the target standpoint, the question is: Did management reject another company’s overtures, not because the offer was too low or didn’t make sense in terms of shareholder value, but because senior management wanted to protect their jobs? The latter reason might still be enough to repel the deal, but they’re going to have to convince the investment community that, over a reasonable period of time they can achieve the same amount of shareholder value as would have been achieved doing the deal.’
So what are the big nos for investor relations when a merger collapses? ‘It’s not the right time to shut down your IR department,’ says one London consultant. Sound ridiculously obvious? Well, according to him, shutting down is a common response. ‘There’s no magic formula except to give as much information and be as consistent and honest as you can. It’s basically a damage limitation exercise, particularly if the City liked the deal, but it’s important to be open and truthful with the market.’ He also advises against going on the defensive. ‘If you’ve spent a lot of time explaining why a deal is a good idea, you can’t suddenly start saying it wasn’t,’ he says. ‘If a merger is not happening, you must be honest about your part in it. Enough people will know the real reasons for the City to hear about them too.’
Panmure Gordon’s John Tysoe agrees with this analysis. ‘First we want to hear the reasons the merger has collapsed. Then we want to hear the real reasons. That means strategy, associated costs, alternatives to strategy, whether the strategy has been torn up; essentially why the merger has failed. We’re not interested in whose fault it is.’
Blicksilver is less decided. ‘Hypothetically I wouldn’t discount any strategy post-break-up which might enhance one of the different parties.’ Again, he says, it really depends on the circumstances of the players involved. ‘There may be a reason why you’re not happy with how the other side has behaved and you may want to tell the investment community about that.’ But, Blicksilver stresses, recriminations will only get you so far. ‘The key thing is your strategy going forward.’
Honesty pays
IR Group’s Mark Hill emphasizes that communication needs to be a key issue rightfrom the beginning of the merger. That means calling a spade a spade, he avers. ‘Often an acquisition will be called a merger because it makes it more palatable to certain constituencies. That’s not going to help you if everything goes wrong.’
Hill believes that failing to communicate is a classic trap that many companies fall into when their plans for a merger are first announced. This applies particularly to international mergers, where the lawyers will often be telling companies not to disclose information about the deal because it could be interpreted by the SEC and other regulators as an invitation to invest.
‘Companies end up either not giving enough information or giving such anemic statements that they weren’t worth making in the first place,’ says Hill. His advice is to ignore the lawyers. ‘The common-sense approach is to communicate as much as possible. That means the merger is less likely to fall through because investors are less likely to lose confidence in it and, if it does collapse, they will feel they can trust what the company is saying about it.’
So take heed, all you IROs who are refusing to answer your phones.
