Shareholder Angst During M&A – Part 3

This is the last of a three-part series about maintaining shareholder confidence through the completion of acquisitions, divestitures and spin-offs.

1)    Common elements of the initial announcement (published November 23, 2014)

2)    Sample questions in preparation for Q&A (published December 16, 2014)

3)    Aligning shareholder mix with new investment characteristics (January 30, 2015)

The first two parts focused on the mechanics of providing timely, comprehensive and accurate information to encourage sound investment decisions at the time of announcement.   This installment recognizes the possible shift in your shareholder mix as a result of the announcement and what companies can do to influence the change.

A great deal of information about institutional investment styles and targeting investors already appears on this web site.  The information will not be repeated here, but a list of previously published material on both topics can be found at the end of this article.

A shift in a company’s shareholder mix of investment styles is a realistic expectation whenever changing investment characteristics, particularly transactions causing rapid change.  The shareholders of the new entity may not have held shares at the time of the announcement.  In fact, there are some transactions in which a change in shareholders will benefit the company’s valuation.

Diversified companies with track records for acquiring new businesses to replace divested businesses will be perceived differently by investors than companies with a track record for organic growth.  The risk reward is different even if all other variables are comparable.  Shareholder apprehension captured in the title of this three-part series depends on the impact of the transaction compared with shareholder expectations.

One example is an acquisition resulting in a significant change in the size of the company’s market cap or position in the marketplace such as moving to number one or two from three or four.  Full appreciation for the accelerated growth may require new shareholders to maximize the company’s valuation.  A smaller, less significant acquisition may increase the valuation but not change the shareholder mix.

Another example of a transaction changing the shareholder mix is the separation of one or more disparate businesses.  Large divestitures and spin-offs resulting in less diversified sales and earnings growth will more than likely experience a change in shareholders.  Smaller business exits and divestitures intended to improve long-term profitability by reducing the size of operations, may increase the company’s valuation without changing the shareholder mix.

There are steps available well in advance of an acquisition, divestiture or spin-off, which will help transition shareholders after the company announces a significant change to its business.  The following describe three actions to reduce shareholder anxiety at the time of the announcement and bolster the perception that the announced transaction is consistent with the logical progression of the company.

Monitor the mix of institutional investment styles holding your stock on a regular basis. Understanding the mix of existing shareholders will help identify what kind of shift in shareholder mix may be necessary after the initial announcement to achieve a fair valuation for the transaction.  There may be time well in advance of an acquisition, divestiture or spin-off to get on the radar screen of prospective investors attracted to the new entity or entities after the initial announcement.

Develop thoughtful statements in response to “have you ever considered” questions about acquisitions, divestitures and spin-offs common to most investor conferences and one-on-one meetings.   It is important to use the same statements regardless of whether the question is asked six years or six months in advance of an announcement.

Some of the risks to be avoided are fueling rumors and speculation; inadvertently leaking or selectively disclosing information; and unintentionally misleading investors that action is closer or more distant than reality.  A leak could lead to a news release, which could kill the acquisition or raise the asking price through unsolicited competing bids.  In relationship to a divestiture or sale, a leak could cause unnecessary concern among your work force (recruitment, retention and productivity) customers, vendors and creditors.

It may appear risk-free to avoid the question by saying “NO” and declining to answer it.  Unfortunately, this approach creates problems in the event the company decides to acquire, divest or spin-off businesses in the future.  Updating your answer at that time may lead to rumors, speculation, leaks, selective disclosure or misleading investors . . . all the risks you were trying to avoid.

The troublesome aspect about the “have you ever considered” question is uncertainty where it is leading and there are many directions it could take. It would be wise to treat the question as though it is being asked about the company’s strategy for growth. The following is offered to help develop answers to withstand the test of time.   It is best to speak in generalities rather than specifics.

Part of your answer should be about the company’s realistic ability to fund and integrate an acquisition.  Answers to the following questions will serve as a starting point:

  • Do you have the capital or access to capital to consider an acquisition?
  • Do you have the management bench strength to manage the successful integration of an acquisition?
  • How many years of industry experience does you management team have in total?
  • Does anyone on the management team bring acquisition experience from another company?

The following questions may help you get started in developing four to six criteria for acquisition.  The questions are not all inclusive and other criteria pertinent to the industry in which the company operates should be added.

  • Would you consider companies within or outside your industry or both?
  • Would you consider companies serving domestic markets or international markets or both?
  • If expanding into new geographic areas, do you want contiguous with current geography or does it not matter?
  • Which is more important, the size of the company being acquired or the price?

Combining capability and criteria, the answer will sound something like the following

“We have not announced an acquisition recently and are not planning to announce anything today.  We have the capital, bench strength and industry knowledge for acquisitions to be an option, if it makes strategic sense for us to do so.  Although I am not prepared to talk about specifics, our general criteria include:  one, two, three four.  We are currently focused on the strategy we described in our financial presentation,” . . . then reiterate the strategy and appropriate portions of your presentation to fund the strategy.

stop_signDo not entertain any more questions about acquisitions.  Explain that you would be happy to answer any questions they have about the company’s strategy and current financial performance discussed in the presentation, but have nothing to add to what you just said about acquisitions.

If your company is not among the top three in your peer group, you will want to be prepared to answer questions about being acquired or divesting businesses.  A good starting point follows:

“We have not announced such a transaction recently and do not plan to announce anything today.  We are focused on the strategy we described in our financial presentation . . . then reiterate the strategy and appropriate portions of your presentation to fund the strategy.

stop_signDo not entertain any more questions about being acquired or divestitures.  Explain that you would be happy to answer any questions they have about the company’s strategy and current financial performance discussed in the presentation, but have nothing to add to what you just said about acquisitions or divestitures.

Provide comparable, historical financial information to increase investors’ understanding about the impact of the transaction.  Although it is a lot more fun to talk about acquisitions and expectations for future growth in financial results compared with historical financial performance, one could argue that providing the financial impact of a divestiture or spin-off is even more important.

If your company has a history of acquisitions, divestitures and/or spin-offs, make the information available to shareholders.  An excellent example among the many companies who provide this information is Thermo Fisher Scientific (NYSE:TMO).  Its 2011-2014 Publicly Announced Acquisitions/Divestitures can be found on its web site under Financial Information.  The one-page document includes the entity acquired or divested, the closing date, business description, principal segment and revenues.

If your company’s future includes a divestiture or spin-off of disparate business(es), start reporting segmented information in your financial results, SEC filings, investor presentations, etc. beyond GAAP requirements.   Explain the variances of the two businesses such as capital requirements, operating margin, seasonal factors and long-term growth of the industries, etc.  It will help expedite the valuation at the time of separation.  However, providing this information will increase the number of questions you receive about divestiture or spin-off, so it will be important to be prepared with an answer that can withstand the test of time.

Once an acquisition, divestiture or spin-off is completed, many companies could make it easier to manage expectations of the newly structured entity.   Providing historical financial data such as unaudited financial results for the trailing four quarters, as though the transition occurred one year prior, can be very helpful.  This work has to be accomplished eventually in order to report prior year quarterly results when the company reports current year quarterly earnings during the first four quarters after completing the acquisition, divestitures or spin-off.  The difference is letting last year’s information trickle out each quarter compared with creating a public reference point to manage expectations for future quarterly results.  This action also helps to better align the mix of investments styles of institutional shareholders of the new entity because it allows them to consider where the company is going rather than where it has been.  A great example is Tyco International LTD (NYSE:TYC) Form 8-K filed with the SEC on January 31, 2012.

I have had success with the advice provided in the previous paragraph, but the opportunity to provide historical financial information prior to reporting current quarterly results was not always available to me.  I have experienced the benefits of providing this information for acquisitions, divestitures and spin-offs, and experienced the hazards of failing to provide it.

Please also see the first two installments of Shareholder Angst published November and December 2014.  Other useful resources include the three-part series titled Communicate Without Breaking Your Stride published December 2013, January 2014 and February 2014, respectively.  To access previously published material or subscribe for email alerts, go to 

Applying Analytics to Investor Relations published on The Heights’ resource page will be helpful as well.  The white paper was later developed into a more comprehensive webcast for Proformative, an international network of accounting, finance and treasury professionals.

The webcast titled Analytics:  The MVP on Your IR Team is now part of  Proformative’s recently launched on-line course curriculum for CPE credit.  You will receive a ten percent discount by using the coupon code Proffer10 and clicking on the MVP icon below.  You will exit The Heights web site.

Slide2The Heights is an experienced, responsive and intuitive investor relations consultancy with a proven process designed to build a comprehensive three-year IR Plan in three months.  Our guaranteed approach removes the guesswork, makes an immediate impression within the financial community and allows you to focus on running your business and building value for your shareholders.  More information about The Heights is available on

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