Investor communications: new rules for M&A success.

• Author: Sirower, Mark L.
• Position: Cover Story

Communications strategy can make the difference between success and failure on everything from securing shareholder approval to meshing two distinct Organizational cultures. Senior management must anticipate investor demands long before announcing a deal to the market.

"Sure, there are some synergies here. I don't know where they are yet. To say that now would be an idiot's game." Barry Diller at the announcement of QVC's proposed acquisition of CBS, 1994

Conventional wisdom has it that the great merger wave that began in the 1990s is over. Indeed, compared with the blizzard of deals announced between 1998 and 2000, merger activity has declined sharply. But by historical standards, mergers and acquisitions are still the primary tool of corporate strategy. What has changed dramatically is the M&A climate.

With the steep declines in the S&P, and particularly the Nasdaq market, the available currency for deals has dropped significantly. Mistakes that were covered up by a rising market are now visible for all to see. Perhaps most important, company directors now understand that they will be held accountable by shareholders, especially for "bet the company" decisions.

This new spotlight on officers and directors is great news for investors, because two decades of research on M&A performance confirm that CEOs often give investors good reason to sell shares on announcement of a major transaction. Too often, M&A communications expose a lack of preparation by senior management, and investors react accordingly. This early reaction of investors is, in fact, an excellent indication of eventual success or failure of the deal. While much has been written about the secrets of successful transactions, little has been said about the communications required to encourage investors to purchase--rather than sell--an acquirer's shares after a deal is announced.

Dealmakers and students of deal-making alike have treated M&A communications as an afterthought. This is a huge mistake, for several reasons. First, well-conceived M&A communications during due diligence can serve as a litmus test for the prospective acquirer in thinking through whether the transaction is a good idea in the first place, and whether it will give investors more reasons to buy than to sell. Another reason is that investors performing their own due diligence use the information contained in press releases, investor presentations, conference calls and interviews. Also, employees, customers and other vital constituencies scrutinize communications materials for signals on how the deal will affect them.

As the Enron scandal vividly demonstrated, shareholders are not nameless and faceless, but are often a company's own employees. So when a deal is met with a drop in the acquirer's share price of 5 percent, 10 percent or more, not only do employees--the folks who will have to make the deal work--lose a significant portion of their pension assets, but morale suffers accordingly, even before the critical task of deal integration begins.

Consequently, communications strategy can make the difference between success and failure on everything from securing shareholder approval to meshing the cultures of two distinct organizations.

The M&A Communications Process

Slick press releases and conference calls can't save a bad deal, but a poorly conceived communications strategy can--and usually will--kill one that may make good strategic sense. Over the last several years, many of the biggest unsuccessful deals, as measured by post-announcement return to shareholders, have performed poorly in large part because the acquirers didn't tell their story adequately. Well-publicized examples include Hewlett-Packard Co.'s acquisition of Compaq Corp., Conseco Inc.'s acquisition of Green Tree Financial Corp. and Newell Co.'s takeover of Rubbermaid Inc. In contrast, PepsiCo Inc.'s acquisition of The Quaker Oats Co. (see sidebar) and Reed Elsevier Plc's acquisition of Harcourt General Inc. succeeded largely because, in each case, the acquirer explained to investors the rationale behind its respective deal--carefully, honestly and succinctly.

As many companies have discovered, it's hard to put the genie back in the bottle once a deal gets a bad...