March 30, 2016
FTI Consulting’s new Corporate Issues Study focuses on six key corporate issues – M&A, Shareholder Activism, IPOs and Spin-Offs, CEO Transitions, Regulatory Changes, and Crises – as seen through the eyes of institutional investors. Part I of the series takes an in-depth look at the role investor confidence plays when it comes to evaluating a variety of corporate issues including Mergers & Acquisitions, IPOs and Spin-Offs and Shareholder Activism.
In this portion of Part I of our series, we take a closer look at how investors evaluate M&A – what they deem to be most important to a successful transaction, what concerns them the most, what types of communications they prioritize and what sources of information they rely upon to make investment decisions.
While factors like price and synergies rise to the surface, investors are also keenly focused on the underlying rationale for the transaction and the way it is communicated to the Street. Our research shows that investor confidence grants additional latitude for companies, particularly in situations where synergies might be limited.
Given the inconsistent track record of M&A, investors highly scrutinize transactions across a number of dimensions. In fact, investors believe that the following factors significantly contribute to a successfully-handled M&A transaction:
Our survey also probed what causes investor concerns throughout a transaction. Topping the list of warning signs for investors is whether the deal has an unclear strategic rationale, an unclear financial rationale, or a high valuation. These concerns existed regardless of whether investors were confident in the companies or not.
Sixty-three percent of those surveyed found the ability to realize cost synergies to be a significant contributor to the success of an M&A transaction. Importantly, if those synergies are in question – or limited – then confidence ends up playing a significant role. The survey found that if an investor is confident in a company, he or she is less likely to be concerned about limited cost synergies.
In the end, this means that confidence translates into increased breathing room for companies. Our data shows that investors are willing to give companies more latitude regarding the specific financial benefits of the deal (i.e., deal synergies) if they are confident in the company’s ability to execute deals.
Among our survey sample, 95 percent of investors said that transparent communications with shareholders is an important factor in a successful M&A transaction. More importantly, investors also deemed communications to employees (93 percent), customers (88 percent) and regulators (85 percent) as being critical to the success of a transaction.
As our infographic shows, the majority of investors turn to a wide variety of sources when seeking information about an M&A transaction – from financial data services such as Bloomberg, which is used by 76 percent of surveyed investors; to company conference calls (75 percent); analyst reports (74 percent); press releases (73 percent); meetings with management (58 percent); and media coverage (52 percent). What the data also suggests is the importance of first impressions – how the company articulates the merits of the transaction in the press release and on the initial conference call as well as how the deal is initially covered by the deal publications and financial data service providers.
Given investor views on how companies can successfully manage an M&A transaction, a few key takeaways emerge:
Companies experience a broad variety of events, transactions and issues throughout their lifecycle – all of which can dramatically impact enterprise value. Smartly managing these critical inflection points can be the difference between success and failure in the eyes of investors, customers, the media and the public at large. FTI Consulting Strategic Communications’ Corporate Issues Study was conducted among more than 300 institutional investors worldwide, and takes an in-depth look at these critical issues through the eyes of the investment community.
In a two part online series to be published in installments over the coming months, we’ll take a closer look at key unifying themes that emerge from our Corporate Issues Study, which is based on survey responses regarding M&A, Shareholder Activism, IPOs and Spin offs, CEO Transitions, Crises, and Regulatory Changes.
Throughout the survey, we also investigated the role that investor confidence plays when it comes to evaluating the six issues above. As data from FTI Consulting’s proprietary 2014 Enterprise Value Study demonstrates, confidence is the key to influencing behavior among employees, customers, investors, governmental leaders and the public at large. In fact, our research demonstrates that confidence is the key to driving action among stakeholders – employees to join or stay at a company, customers to buy products and services, investors to purchase and hold stock in the company, and policymakers and citizens to advocate for the company in their communities. The overarching takeaway, which will be borne out in our series: when investors have confidence in a company, that company receives significant breathing room to operate, particularly when faced with a critical event, issue or transaction.
To determine the impact of confidence on the perceptions and behaviors of investors, FTI Consulting developed a split sample survey approach whereby participants were randomly selected for two groups. This was done for each confidence related question. The questions posed to each group were identical with one exception: one group was asked to answer the question about companies they were confident in, the other about companies they were not confident in. Results were then compared and the differences (delta) between the means of both groups were calculated. Statistical analysis was then performed on the data to ensure that the differences were statistically significant at the 95 percent confidence level.