Mergers and acquisitions are more likely to be successfully completed if both sides employ financial PR agencies, new academic research has shown.
The study Selling the story, which has been conducted by academics at Cass Business School, considered 198 merger and acquisition transactions that took place between 1997 to 2010 and which were valued in excess of £100 million.
It found that, of the 81 transactions where both sides employed financial PR agencies, just seven (or 8.6 per cent) failed to complete. The proportion of deals that failed to complete rose to almost one in four when just one side employed a financial PR agency.
However, 32 per cent of takeover deals failed to complete when neither side employed the services of a financial PR agency.
However, the authors of the research concede that their analysis does not take into account whether a takeover deal is friendly or hostile or indeed employing a financial PR agency had an impact on either short or long-term value creation.
But the report does find further evidence that a proactive communications strategy has a beneficial impact on takeover deals. It has found a clear impact on deal consummation and short-term shareholder returns from ‘good quality’ merger and acquisition announcements.
‘This research clearly shows the importance of properly resourcing deal teams’ communication efforts,’ explains Scott
Moeller, director of the M&A Research Centre at Cass Business School, and a co-author of the report. ‘But it also throws up some surprising findings around the immediate market response to deal announcements. For instance, it appears that equity markets can – in the very short term at least – reward a lack of public information about an M&A transaction.’
The authors considered two metrics for deal success. They looked at whether the transaction actually completed and also whether it led to short-term increases in the combined value of the target and buyer compared with an average benchmark. The Cumulative Average Abnormal Return (CAAR) value was calculated over a five day period, from two days before the deal was announced to two days afterwards.
The analysis found that deals that had carefully planned communications strategies were more likely to complete than those that did not. For example, it found that 84 per cent of potential deals which were announced as planned and scheduled (without prior leaks to the media or the marketplace) successfully reached completion.
By contrast, just one in two deals successfully completed when the companies were forced to make premature stock market announcements in response to speculation or rumours, which prompted either press coverage or the regulators to get involved and demand clarification.
However, the timing of the announcement also played a role. Deals that were announced before the start of the trading day were more likely to successfully complete than those that were announced later.
Slightly fewer than one in five deals that were announced before 7.15am proved to be unsuccessful, against 35 per cent of those that were unveiled after 9.00am. But the optimal timing for announcements appears to be between 7.15am and 9.00am: just 13 per cent of deals unveiled in this time slot failed to complete.
However, the research also reveals that those transactions that ‘leaked’, prompting reactive announcements, enjoyed greater abnormal returns over the five day period than those deals that were proactively announced and managed. The target company in a leaked deal scenario enjoyed abnormal returns averaging six per cent over the trading period under consideration, compared to just two per cent when the deal was formally announced.
The findings surprised co-author Jeetesh Singh, who had predicted a negative return because ‘the market is responding to half-baked information’.
He adds: ‘It may be that this sort of speculation causes a stir in the market, leading to the target company being bid up.’ The findings may not hold over a longer time horizon, when the market has had time to absorb the information. But other factors may then also impact the share price, making it harder to draw conclusions.
Ironically, the researchers also found that those deals where no strategic rationale was provided at the outset actually outperformed those where the management laid out the reasoning behind the takeover. Those deals where no further information was available at the outset generated, on average, abnormal returns of seven per cent over the first five days, compared to just three per cent where the management offered three or more reasons. Singh attributes this outperformance to ‘higher anticipation in the market, and an ‘anxiety factor’ as investors wait for follow-up communication as to why the acquisition or merger is taking place’.
The final conclusion drawn by the researchers was that deal announcements containing quotes from either the chairman or chief executive of both companies are more likely to succeed. Nine in ten deal announcements which included such statements completed, compared to just 67 per cent of those deals where neither side included a statement from such senior executives.
Ironically, just 57 per cent of deal announcements which contained a statement from the chief executive or chairman of one of the participating companies actually completed. The researchers opined that this anomaly may arise because investors perceive either reluctance or outright hostility to the transaction from the side that has failed to comment.
MERGERS AND ACQUISITIONS HIT HIGH NOTE
Merger and acquisition transactions valued at more than $3,230 billion (£2,110 billion, or roughly the equivalent of Germany’s gross domestic product) were completed around the globe last year, according to Mergermarket.
The total value of deals was 44.7 per cent higher than those transacted in 2013, and just 11.8 per cent less than the $3,650 billion recorded in 2007, before the financial crisis hit markets. It was the third highest annual total since 2001.
Much of the deal flow was due to private equity firms disposing of assets, leading to two records – the value of the exits ($489.3 billion, 21.4 per cent above the 2007 peak) and the number of transactions (2,054).
More than 5,500 deals, totalling $1,400 billion, were cross-border transactions, which averaged $453.9 million in size, up from $291.4 million in 2013. Mergermarket attributed this inflated deal size for cross-border transactions to European interest in American companies. For example, German corporations made three of their biggest ever acquisitions in America last year, with each deal valued in excess of $12.7 billion.
But deals totalling $221.4 billion failed to complete last year. More than half of these lapsed deals (52.3 per cent) were in the pharmaceutical, medical and biotech sector.