Three important functions

Preparing for Announcement Day serves three important functions.

First, well-conceived M&A communications during diligence can serve as a litmus test of the deal logic for acquirer executives—where they can think like an investor—well before Announcement Day itself. Think of it as the last stop in diligence. Does the deal give investors more reasons to buy than sell? Second, press releases, investor presentations, conference calls, and interviews will provide investors with fodder for their own diligence. Third, culture starts at announcement. The words leaders use matter to employees on both sides, so communications must be thoughtful and intentional. Don’t say you are buying for the best of both companies when you don’t mean it. Leaders are setting a tone—and expectations—for how things will work.

Although employees and shareholders—and customers and suppliers for that matter—may not have a perfect alignment of interests, they certainly do have a lot in common. All sides have to deal with uncertainty and doubt and all want to know the logic of the strategy behind the deal, the CEO’s plan, “what’s in it for me” (WIIFM), and if the new executive team has the experience—and stomach—to manage the new organization if something goes wrong.

How should a company prepare a sound M&A communications strategy? By taking the process seriously: Don’t prepare the weekend before your announcement. Develop a story for important stakeholders, presenting them with the same logic that convinced you that the deal is worth doing, where the synergies lie, and how you’ll achieve them. Finally, make sure that you anticipate what your critics will say and the questions that will come at you during the announcement. This will require you to view the deal from the outside in. But each of these three functions will prove worth the effort because they will get you in front of the market’s reaction.

Get started early

Companies must put themselves in the shoes of investors long before transactions are brought to the board. Communications experts should be brought in as early as possible to understand the transaction and strategic benefits so they can begin crafting the communications package. A merger rollout is akin to a political campaign, with detailed schedules, timetables, and risk factors—and plans for responding to opponents. Too often, this process gets underway too late.

Discuss in detail the deal assumptions, specific benefits and synergies, worst-case scenarios, and execution timetable

The marriage partners must think long and hard about their message and the forum for delivering it to their key constituencies, including shareholders and analysts, bankers, employees, media, and customers, and frequently, unions, regulators, government officials, strategic partners, and rating agencies.

Moreover, materials should explain clearly and logically why the transaction’s business case is value-enhancing. If the deal is dilutive to EPS in the short term but makes strategic sense long term, there had better be compelling economics for profitable growth. Investors and employees especially must be convinced that the company is capable of delivering on its promises and that they will be better off if the deal is completed. If the deal is truly strategic, you will also need to describe why you needed to pay the premium to do it.

Prepare an exhaustive question and answer document in advance for potential critics

The press release, the investor presentation, letters to various constituencies, and other documents will emerge during Announcement Day preparations. The Q&A document attempts to ask and respond to all the tough questions that investors, analysts, and the media will likely ask on the morning of the announcement. If the deal team can’t convincingly answer the 40 or so questions crafted by the communications team, that will not augur well for the transaction. (These are similar to the questions that an engaged board should ask before they approve the deal. For more detail on the board’s role, see chapter 9.)

In fact, asking tough questions may force the deal team to think about details they may not have carefully considered, such as:

• What are the major sources of cost savings?
• Where will layoffs take place?
• What plants will be closed?
• What is the timetable?
• What are the revenue implications?
• Are there operating model changes for the businesses?
• Who will lead the integration process?

Managers should avoid carelessly using buzzwords like “convergence” and “synergies,” which, together with an excessive acquisition premium and without a plan, send a clear message to investors: Sell.

1. Do you have a credible case with defendable and trackable synergy targets that you can deliver and that investors can monitor over time?

The story that you’re telling—the strategic logic—must address why the company can beat existing expectations, as reflected in the pre-announcement share price, and do so in ways not easily replicated by competitors. This logic must be accompanied by reasonable operating targets that can be easily understood, tracked, and monitored.

Forecasting overly optimistic gains from would-be synergies without explaining how or when they will be realized sends a red flag to investors. You might as well say nothing rather than make bold predictions that obviously can’t be assessed or tracked.

More important, investors simply do not believe one big fat synergy number—the kind that’s so often given in investor presentations. Why? Because they can’t track it or assess the logic of how specific gains will add up to the total. But they can and will expect to track details. When management cannot give credible guidance that investors can track, it fails this first crucial test and comes across as seriously misguided. Stating one big number with nothing to track signals there is no plan.

Consider the case of a large technology company that announced its largest-ever acquisition of a rival, an all-stock deal at a 25 percent premium. On announcement, management announced a whopping $2.5B of cost synergies, most of the savings based in headcount reductions but without any guidance at all about which businesses those reductions would come from or when they would happen. They also announced that their combined revenues would be down by 10 percent in the first year. Their amorphous statement that they would achieve those synergies sometime “over the following two years” is not guidance. Markets hate that.

The result? Their share price dropped so much on announcement that the target was worth less at the end of Announcement Day than at the beginning, more than erasing the 25 percent premium offered to the seller in this all-stock deal.

Less obvious, and potentially more damaging, is forgetting about your own growth story and announcing, without sufficient explanation, a radical change in direction to what you have been delivering. Investors have been attracted to your strategy because they regard you as expert in your business. Telling them that you’re going to acquire another company and head off in a new direction—without showing them how and why—is inviting disaster.

Consider the classic case of Conseco, a financial services company that led the S&P 1500 in total shareholder returns over a 15-year period, with a 39 percent average annual return to shareholders. Conseco had a long track record of focused acquisitions, buying over 40 regional life and health insurance companies, immediately taking costs out the back office, and integrating the acquisitions into Conseco’s back office systems in Carmel, Indiana. Conseco tracked these companies and, from experience, understood how much it could predictably take out of costs, how long it would take, and how much it could pay to do it and deliver superior returns to shareholders.

Just as important, investors grew comfortable with Conseco’s strategy and were rewarded with increasing growth value in the shares year over year. They believed that such a successful strategy would continue.

But in 1998 Conseco announced its largest deal ever, offering $7.6B for sub-prime mobile-home lender Green Tree Financial at an 83 percent premium in an all-stock deal. Conseco CEO Steve Hilbert attempted to present the acquisition of Green Tree as “strategic” by asserting that the company had a successful track record and that the acquisition gave Conseco a position in a growing part of the financial services market. He also asserted that the deal was not driven by cost savings, as Conseco’s past deals virtually always had been. Instead, synergies would come from revenue increases from cross-selling.

Conseco’s shares dropped by more than 20 percent on announcement and were down 50 percent within a year. The company filed for Chapter 11 bankruptcy protection just a few years later. Not only was the deal a radical change in strategy, but it also gave investors nothing to track. Investors won’t believe the deal is strategic, with lots of benefits, just because you say it’s so.⁵

In contrast, when Nexstar Media Group announced its $6.4B (with assumed debt) all-cash acquisition of Tribune Media in December 2018, its investor presentation clearly spelled out the strategic, financial, and operational rationale, along with plans to better compete within the rapidly transforming media industry by “delivering a nationally integrated, comprehensive, and competitive offering across all our markets.”

Nexstar effectively shaped investor expectations for the new organization, and clearly spelled out the breakdown of the trackable $160M synergy target—$20M for Corporate Overhead (duplicate expenses), $65M Station and Digital Group Expense Reduction (station expenses, support services, revenue migration from third-party vendors), $75M Net Retransmission Revenue from Tribune programming (margin uplift by applying Nexstar rates to Tribune subscriber counts)—all projected to occur in the first year following the completion of the transaction, along with planned divestitures (estimated at $1B, based on Federal Communications Commission ownership rules). Perry Sook, Nexstar’s CEO, also stressed the company’s ability to generate projected synergies based on the success of achieving promised synergies in recent deals.⁶

Investors responded by bidding up Nexstar’s shares by 11 percent (nearly $400M) in the 48 hours following announcement. Nexstar then went on to outperform its peer index by 14 percent in the first year after announcement with a 38 percent total shareholder return.

Providing investors with trackable details of the deal is vital to earning—and maintaining—their trust and confidence. Further, those acquirers with strong acquisition track records of delivering on their promises have a real advantage. Acquirers announcing their first material deal to public markets with significant synergy promises, along with high premiums, or a transaction with a radically different deal thesis than in the past, will have to be even more clear and convincing in their presentation—particularly for all-stock deals that are typically met with skepticism.⁷

2. Does your story help reduce uncertainty and give direction to the organization so employees can effectively deliver?

Uncertainty is one of the unavoidable facts of life in M&A—especially for employees, who are the ones who have to execute the plan. But major M&A announcements that inject unnecessary uncertainty are even more disruptive, compounding the already unsettling effects of integration planning. Such announcements will not only cause employees to question the deal logic but will also prompt many of them to aggressively consider other career options.

Employees will want to know quickly and honestly how they will be affected. So the best investor presentations will have the new management team and key reporting relationships in place when the deal is announced to avoid a leadership vacuum that can jeopardize the integration of the two companies. Executives should also address facility closings that require major relocations and headcount reductions before they communicate anything that can easily be misconstrued and spark the rumor mill. Acquirers committed to their employee experience understand that their new experience begins at announcement.

The large technology company that we discussed earlier (under question 1) said that it would achieve $2.5B in cost savings, largely by cutting 15,000 employees over a two-year period. But employees and investors knew that the companies had already planned and announced combined reductions across the two companies of about 11,000 employees prior to the deal. This announcement went over like a ton of bricks with employees since it provided no guidance on where cuts would come from. It also, predictably, created a headhunter’s paradise. The uncertainties implied by the announcement of this strategy contributed to the 19 percent drop in the acquirer’s shares on announcement. Shares continued to decline as the battle between the target and acquirer heated up in the press.

Consider the clarity of the investor presentation of Avis Budget Group when it announced the all-cash acquisition of Zipcar in January 2013 at a healthy 49 percent premium. The deal would allow Avis Budget to become the leading innovator in the rapidly growing car sharing space and allow Zipcar to accelerate its growth by leveraging Avis Budget’s existing vehicle rental infrastructure and technology footprint. The investor presentation stated the deal would generate $50M–$70M in annual synergies from three sources, in relatively equal parts, outlined in detail in the investor presentation: cost (lower fleet acquisition costs; lower vehicle operating, financing, and insurance costs; and lower general and administrative (G&A) expenses and elimination of public company costs), cost and revenue from fleet utilization (meeting Zipcar demand with a smaller fleet by utilizing available Avis Budget cars and expanding Zipcar’s weekend opportunities), and pure revenue synergies (from expanding several Zipcar use cases in its customer base, product offerings, and locations).⁸

For employees, equally important was Avis Budget’s commitment to the “Zipster” experience, which had focused on the goal of revolutionizing personal mobility. Ron Nelson, Avis Budget’s CEO, announced that both the CEO and president/COO of Zipcar would remain in their leadership positions, and also emphasized the deal would enhance personal and professional growth opportunities for employees. Zipcar would also retain its Massachusetts HQ.

The Avis Budget presentation even made clear the difference between yearly P&L benefits versus the run rate they would achieve by the end of each year—a strong signal that senior management had thought this through and had a plan. They also stressed their past acquisition track record in achieving promised synergies. Investors responded with strong positive announcement return of 9 percent (roughly $200M of shareholder value) and exceeded their peers by 64 percent with a 105 percent total shareholder return in the first year.

There is only so much that can be covered in the presentation, so early signals like these matter a lot for employees as well as for investors and customers. The more acquirers can do to shape expectations at announcement, the more employees can begin to sense how they will fit into plans for the future. Early signals like announcing leadership or commitment to shared values or the customer experience—followed shortly thereafter with timelines for knowing the process of talent section and benefits—will calm employees so they initially feel better about the deal, and later spark their interest in how the deal will come together, inspiring them to see their futures with the company (more on this in chapters 7 and 8). Even if uncertainty can’t be removed entirely, it can be reduced. And employees who have a clearer view of the future will be better able to engage, or at least be less distracted, with pre-close planning and post-close execution.

3. Does your presentation convincingly link post-merger integration plans to the economics of the transaction?

As we’ve discussed, acquisitions typically involve the payment of a significant premium to the shareholders of the selling company. That premium is a shock to the system that no one expected—an immediate and direct addition to the growth value of the target and the cost-of-capital clock starts ticking on Day 1. Unfortunately, the message communicated to investors does not always square with the performance required to justify the price being paid.

Even when management offers credible answers to questions 1 and 2, investors will mark down the acquirer’s share price to reflect the deal’s “true value” if the present value of the synergy numbers does not justify the premium—or if the premium creates a performance improvement problem that is likely not achievable. Think of it like a simple economic balance sheet. If the premium doesn’t represent value likely achieved (predictably overpaying for assets), then the economic balance sheet stays balanced by subtracting the predicted overpayment from the acquirer’s shareholder value.

To be even blunter: Don’t forget that your investors can do math and that they will evaluate the economics of what you are promising.

Nothing is more likely to cause investors to sell their shares than a deal that cannot justify the value being given to another company’s shareholders. Failure of the acquirer to provide critical information might cause it to lose even more value than the premium, because of the signals the announcement unwittingly sends to investors that the company might be trying to cover up other internal problems and can’t achieve its own stand-alone value.

Consider the case of a large international insurance company that offered an all-stock $5B premium for a US-based insurance company but stated there would only be $130M of annual pre-tax synergies. If we capitalize the $130M at their 10 percent cost of capital—just like investors did—the synergies have a present value of only $1.3B (without accounting for taxes and assuming all synergies would occur in year 1). Investors are smart. The would-be acquirer’s market value dropped by more than $3.5B—roughly the gap between the premium and the present value of the announced, trackable synergies—right on the announcement of the bid, drastically lowering the value of the offer and allowing another global insurance company to emerge as the winning bidder.

In contrast, Nexstar offered a 20 percent, or $700M, premium for Tribune. Doing the same calculation, and capitalizing $160M of pre-tax synergies that Nexstar stated would all be realized in the first year, with an effective tax rate of 27 percent and a 7 percent cost of capital, yields $1.7B of value—well above the acquisition premium.

Even long-run, experienced acquirers can run afoul of investors when they announce a transaction that seemingly deviates from their proven business model, predicting benefits for one type of deal based on the success of other, completely different transactions. For example, one large consumer goods company announced its $5.6B acquisition of a branded products company at a 50 percent premium. The acquirer had a successful 30-year track record of making small, single-product acquisitions integrating small “tuck-in” deals that focused on efficiencies. Trouble was, this new deal was 50 times larger on average—10 times larger than their largest deal—and vastly more complex than any of its earlier transactions.

Although both companies sold household products through similar sales channels to the same pool of customers, they competed differently. The acquirer focused on low prices versus premium-priced branded innovative products. They had different production processes and cost-structures. The acquirer would have to defend the revenue trajectory of those premium-priced branded product lines, even without paying a large premium, against increased competitive threats by cheaper knock-off products.

The acquirer’s shareholders lost $1B on the news—precisely the amount of the acquisition premium—and its shares plunged by one half in the first year. The CEO later admitted, “We paid too much”—something investors knew right at announcement.⁹

Acquirers, even the best ones, must recognize what they are promising and the challenges that investors will see right from the beginning, and plan their communications accordingly.

These three questions can be summed up in one straightforward question that boards and managers should ask themselves on the eve of the vote on the big deal: How will this deal affect our stock price and why? As a director or leader, you have to believe that the transaction is worthwhile given the price and all the organization disruption that lies ahead, and that it is in the best interests of your shareholders—not just now but through to the completion of the deal and beyond. And your Announcement Day communications process must give stakeholders the same sense of confidence that you feel.

Remember, if you don’t answer these three questions, investors will assume you can’t answer them and that you don’t have a plan, and they’ll penalize you for it.

Formally define and document the deal thesis and key messages

You should already know how this particular deal fits into your overall strategy. That’s what we have been stressing up to this point: creating, articulating, and refining your deal thesis. Now is the time to focus on how to communicate the logic of this particular acquisition to all relevant stakeholders. While you should know the logic cold, articulating it can be another challenge. Announcement Day is the chance to crystalize key messages for how the deal delivers on the future strategy for the company. One concrete tool you can create is a “talk track,” or a script that can be used consistently internally and externally for leaders and communications teams to communicate about the deal rationale.

Define stakeholders

What types of employees do you have? Do they work different shifts? What access to technology do they have? Determine what audiences (senior management, managers) would need a preview message and what support, or talking points, should be provided to key messengers. Consider what general outreach you would have across all of your employees and other stakeholders (e.g., email announcement to follow press release), and what specific outreach may be required to address constraints with certain employees (e.g., locations, access to technology).

Collaborate with external communications

The talk track is a central asset in building a set of messages that can be used externally and internally. Assume external communications will be sought out by employees who are looking for any information they can find on the deal, especially in light of how prevalent information is today. Confirm any points that could be perceived negatively on the deal, such as headcount synergies, and have a clear key message that can address concerns head-on.

Demystify any themes or messages in external communication directly in internal messages. We have had clients, for example, who referred to revenue synergies in the press release, and used internal succinct messages to clarify that the opportunity focuses on growth and expanded market opportunities with headcount staying flat. Regardless, absent clarification, employees may become anxious and assume a worst-case scenario.

Consider the local dynamics of the target and consider whether local news could be a risk or opportunity. Consider a non-disclosure agreement (NDA), or an embargoed press release or interviews, with certain influential local media outlets to control the narrative on the deal. Understand the risk of how the deal could be perceived by a hyper-local economy. Consider whether local news will reach certain employee groups, like the night shift, prior to corporate communications.

For internal messages, consider the target employees’ main concerns: Do I have a job? To whom will I report? How is my job changing? Address questions directly where possible, or if unknown identify that the discovery process is ongoing and decisions have not been made. Where possible, let employees—yours and the target’s—know when you will be able to tell them more.

Consider messages that may be required for other parties like customers and vendors, and provide support to employees who will have to interact with these parties through talking points aligned to the overall messages for the deal.

Select communication channels

When considering communication channels, confirm that all stakeholders have access to multiple communication channels (e.g., internet, computers, mobile access, livestream video, etc.) that enable wide message access. Where good policies and practices already exist, consider how to leverage social media. It’s important to monitor how the deal is being perceived across social media so you can tailor your approach as integration planning begins.

Traditional communication methods—email announcements, meetings and town halls, livestream video—can be supplemented with other visual marketing cues (e.g., posters in breakrooms, local signage at entry points to plants) to create excitement. Consider other marketing mechanisms, such as direct mail or recorded telephone messages, for audiences where timing of announcement may not align to employee work schedules.

Establish timing and presence

Determine which members of the leadership team you would want to be present, where, and when. Balance the level of disruption at both the acquirer and target to create prioritization of physical presence. Be conscious of the perception of “bringing the army” if only acquiring executives need to appear on the first day. Determine who from the target leadership team you would or would not want present.

Contemplate the schedule of workers and whether all shifts should hear the news together, or if communications schedule could be shift-based (and whether that creates risk for the night shift if you announce in the morning). In preparation for announcement, consider a leadership pre-session to prepare key leaders and confirm final schedules.