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At a glance A big deal Adequate response Business as usual |
It’s often said that a takeover battle is the most challenging time for a company, not to mention a hectic experience for an IR team. After M&A activity accounted for a record-breaking $3.8 tn worth of deals in 2015, and sustained growth in the number of transactions in Europe, the Middle East and Asia – activity in North America and Latin America has slowed – in the first quarter of 2016, it’s fair to say IR departments are being kept on their toes. Responses of IROs to these demands vary, however: some are exhilarated by the deal process, others less so.
One IRO not complaining about additional workload is Kate Ferry, director of IR, PR and corporate affairs at London-based retailer Dixons Carphone. ‘Certainly in my IR role, the thing that’s made it quite so enjoyable is the amount of M&A we’ve done,’ she says. ‘As an IR person you have to seize that brilliant opportunity to be out there talking to shareholders and thinking about your story, and also to get to know your senior leadership team incredibly well.’
Originally from the Carphone side, Ferry has worked closely with her former CEO Andrew Harrison on the various transactions her firm has carried out over the years. During the recent merger with Dixons Retail, Ferry acted as a ‘deal lead’ in charge of co-ordinating the banks and lawyers of both parties, and was also responsible for setting the calendar. ‘Ahead of the day you do your Rule 2.7 announcement to the market, you really have to make sure you’ve got the rationale absolutely right,’ she stresses. ‘And you have to think about how you’re going to sell it because the key to any deal is the support of your shareholders.’
Joele Frank, founder and managing partner of Joele Frank Wilkinson Brimmer Katcher, the New York-based financial communications firm, highlights the importance of following up the launch day statement with one-on-one shareholder conversations ‘in order to build momentum and support. If investors are upset, you need to quickly find out whether it’s about the transaction’s fundamentals or an uninformed perception of it, and then address those concerns head-on before they gain steam and become an accepted reality.’ She adds that her firm is sometimes hired to help resurrect a deal after a bad launch.
For Sarah Elton-Farr, head of global IR at UK pharmaceutical firm Shire, M&A experience has definitely been a steep learning curve. After four sets of deals including a failed takeover attempt by AbbVie in 2014 (see Attracting a higher bid, below), the former analyst is now ‘a well-oiled machine’ with regards to understanding shareholder concerns and anticipating questions that are ‘very different from the normal IR issues that relate to the business and the strategy,’ she says. ‘You get bombarded by people who are obsessed with the timing around the deal and the risks [associated with] the deal closing.’
At Shire, investor relations will typically be informed at least a week ahead of a transaction. ‘Our role is to prepare for the markets the materials that explain why we want to do this deal, what we particularly like about it and how it fits with our strategy,’ Elton-Farr explains.
The process involves making presentation scripts, doing due diligence on how the market might perceive the transaction, and setting up a Q&A for senior management, as well as debriefing after the deal has taken place. ‘It can be quite intense because you don’t always get that much notice for confidentiality reasons and the timing of these things is not set by what’s convenient from an IR team’s perspective,’ she notes.
Insider knowledge
Furthermore, the buyer’s IR people are expected to know almost as much about their target as they do about their own company. ‘The people asking you the questions may have been following the target company for 10 years or more while you might have 10 days at best – sometimes three or four – to get up to speed,’ Elton-Farr says. ‘So that’s the biggest challenge: to very quickly grasp what the key issues might be on a whole new firm. Of course, it will be easier if it’s a smaller-sized company you’re buying.’
Companies like Shire that are known to be in an acquisitive stage face the additional test of maintaining a ‘business-as-usual’ demeanor with investors and analysts in order to avoid them suspecting something’s up. ‘You have to be like a swan: calm on the surface but with legs paddling madly underneath,’ Elton-Farr jokes.
Ferry says the Dixons Carphone merger was easily accepted as an ideal match between telecoms and an electrical retailer. With more and more items becoming interconnected and controlled by the mobile phone, ‘having connectivity within a big electrical store is absolutely crucial,’ she explains. ‘Our CEOs had discussed it already – they were friends – which meant from the outset that I could work closely with my counterpart at Dixons. That obviously makes things much easier when you’re developing the messaging.’
Apart from an early leak to the press (see Dealing with a leak, below), the execution also proved ‘a textbook deal’, in Ferry’s words. ‘It went so smoothly, so quickly, it was so amicable and everybody was keen on it,’ she says, comparing this deal with the earlier takeover of Best Buy, which involved ‘a little bit more classic M&A game play’.
‘If we’d made a list of what we hoped would go well, the key being the cultural point, it honestly could not have been better,’ Ferry says. ‘And throughout it all there was a lot to do combining two massive businesses.’
Getting shareholders on board
Malaysian bank CIMB’s head of IR Steven Tan doesn’t recall such pleasant times when his firm announced to shareholders in 2012 its plan to acquire Royal Bank of Scotland’s (RBS) investment banking branch in Asia. ‘The biggest challenge we faced during that takeover was certainly with investors, especially foreign ones,’ he says. ‘At the time, there was a downturn in the markets and in the investment banking business in the whole region, so we had a lot of resistance externally.’
While local investors were more accepting of the transaction’s rationale – a significant deal ‘from a name perspective’ with a relatively small Malaysian bank acquiring the operations of a major European financial group – foreign ones had reservations about the quality of the RBS assets. ‘Our main focus was to ensure everyone understood the deal wasn’t that substantial from a dollar perspective and therefore didn’t involve too much risk per se,’ Tan explains. ‘We made sure we communicated with our stakeholders and went on the road in order to convince skeptical foreign shareholders as much as we could.’
For her part, Frank insists on the importance of understanding shareholder expectations and verifying that they are in line with the company’s long-term strategy in order to ‘be prepared and able to adequately respond to an offer, whether friendly or contested. Ideally a company will have previously discussed its own M&A, including any acquisition criteria, so shareholders are not surprised by a decision to make, accept or reject a proposal.’
One of the pitfalls to avoid when planning a transaction is not knowing ‘really well where your investors’ heads are: never assume,’ urges Ferry. ‘With any deal, you’re looking to get the vote from everybody and it’s always surprising to see those you think are absolutely in the bag suddenly not in the game.’ To that effect, she advises seeing investors well in advance but also keeping the dialogue flowing. ‘You might have overlooked some shareholders and presumed they were on board,’ she cautions. ‘And you can sometimes have a very good meeting and then get a ‘no’ vote.’
Business as usual
Ferry also highlights the internal role IR has to play during a deal. ‘In IR you’ve got to be so linked in to all communications,’ she says, explaining how the initial external document is prepared for distribution to the media. ‘Most importantly we figure out how to turn that into something more digestible for our colleagues, so my role will be liaising with all our internal communications people and making sure they know what’s going on.’
Media exposure should be discussed and agreed upon, advises Tan, citing an earlier transaction that was complicated by an ‘overly media-friendly counterpart. The other company was disclosing a lot of information to the market, something we weren’t keen on. I think we could have kept it in check a little bit more.’ He adds that one of an IR professional’s key jobs is ‘to balance disclosure with protecting the sanctity of the deal.’
IROs should not halt their program or put aside their daily tasks because of a transaction that may or may not complete. ‘If you’ve been radio-silent for five or six months, you’re coming back from a weak position,’ Elton-Farr says. ‘So it’s very important to do business as usual: there’ll be a lot less interest than typically but where there is, continue to talk to shareholders. The deal is not done until it’s closed.’
Shire’s investor relations team was planning to set up a new customer relationship management (CRM) system, a project that was eventually postponed because of the AbbVie merger attempt. ‘When the deal collapsed we didn’t have the CRM system,’ says Elton-Farr. ‘We were doing an awful lot of work to get back up to speed and if we’d had that it would have been so much easier. In general, I wouldn’t recommend anyone change plans.’
Not all in it together
Cross-company co-operation is all very well during a transaction but it comes with ‘a bit of an elephant in the room’: the knowledge that only one IRO will stay on board once the tie-up is completed. ‘That’s one difficult aspect of a merger or takeover, because clearly at senior leadership level you can only have one CEO, one CFO and one HR director,’ Ferry explains, adding that despite the inherent competition the Dixons and Carphone teams had got along well and grown to like each other.
‘A takeover is quite a traumatic time because in IR you don’t expect to keep your job when you get acquired,’ agrees Elton-Farr. But building a relationship with the target company’s IR team is crucial to ensuring the messaging on products is consistent, she adds. And she notes that most IR people in this type of situation are very helpful – albeit for pragmatic reasons. ‘You know your chances of finding another job are dependent on your reputation,’ she says.
Getting straight to the point, Ferry commends the exceptional visibility an IR professional can gain from an M&A deal. ‘Because the City’s reaction is crucial to any transaction, as an IRO you’re in the limelight, at the center of attention,’ she says. ‘So when the opportunity comes along, make sure you really grab it to shine and get your name out there!’
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Attracting a higher bid The best way to get the right price for your firm is to always be in defense mode, according to Sarah Elton-Farr, head of global IR at UK pharmaceutical firm Shire. Because the strategy of Shire’s then recently appointed CEO had yet to be fully acknowledged by the market, the first offer from US-based AbbVie, which was seeking a tax inversion, did not reflect the value of the company, she says. ‘If we had been a bit quicker in explaining what we were doing to the market and helping it understand our pipeline, I think we would have struggled less to get AbbVie’s offer up there.’ The firm reached out to its major shareholders, traveling around the world to explain where it saw the additional value and why it should hold out for a better offer (which arrived in July 2014 and was eventually pulled after the US government restricted inversions). ‘If you want to get full value for your firm, always put your best foot forward and never assume the market will get there eventually,’ Elton-Farr advises. |
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Dealing with a leak The merger plan between Dixons Retail and Carphone Warehouse was leaked to the press in February 2015, with less-than- fortunate timing. ‘We’d all gone away for half-term and suddenly I had 45 missed calls,’ says Kate Ferry, director of IR, PR and corporate affairs at the merged company. ‘It was a big challenge at the time, because suddenly you’re working almost backwards: the plan is out there, now what’s the messaging? What should we say?’ Although the transaction went smoothly thanks to both parties being amicable and a geographical proximity that allowed both parties ‘to meet at the drop of a hat’, the leak meant the process was speeded up, with the official announcement made in May and the transaction completed in August. ‘These transactions can take ages but we literally went from talking about it to doing it in six months,’ Ferry says. |
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Field guide to a hostile takeover ‘Communications during a hostile takeover is the Olympics for PR and IR,’ explains Joele Frank, founder and managing partner of Joele Frank Wilkinson Brimmer Katcher. ‘The opposition inherent in a hostile bid creates challenges as well as opportunities. It causes companies to rethink what and how they communicate with investors. From the target’s perspective, investor messaging needs to address the terms of the offer relative to the company’s stand-alone plan. From an acquirer’s perspective, messaging needs to enlist the support of the target’s shareholders without alienating its own investors. Messaging around the road map to completion can be as important as the value proposition itself. ‘Communications in hostile M&A are fluid, and the need to remain flexible and act quickly can be a challenge for some corporate cultures. While some planning is possible, the precise tactics used will depend on how and when events unfold and how the acquirer or target responds. Daily team calls including the company’s advisers are prosaic, but necessary.’ |
This article appeared in the fall 2016 issue of IR Magazine
