Deal execution skills are key for trust in M&A strategy

M&A activity is expected to remain robust into 2016. New research into the investment community's most critical issues finds that transparent communication to a range of stakeholder is key. The research further finds that investors’ confidence in a company’s ability to execute deals is crucial to whether the transactions, explicitly those with unfavourable synergy opportunities, were viewed positively – giving companies latitude to execute wider strategy.

Mergers & Acquisitions (M&A) activity has been running hot globally, topping $4.9 trillion in 2015. This year is expected to be another bumper year of activity in the US. In order to generate long term value from a deal, it is, however, key to ensure M&A fundamentals are in place.

In a new study by FTI Consulting, titled ‘Corporate Issues Study’, the firm considers a range of factors that are of critical issue for the investment community – including the role investor confidence plays when it comes to evaluating a variety of corporate issues including M&A. The study itself involved 300 institutional investors worldwide.

Clear communication
The research found that a key area of interest for investors, in relation to an M&A transaction, is transparent communication with stakeholders. 95% of investors reported that clear communication with them about a deal is important. However, a range of other stakeholders were also seen as important recipients of transaction news. The most important stakeholders are employees (cited by 93%) followed by customers (88%) and regulators (85%). Getting a clear picture out to a range of stakeholders about the deal provides investors, and stakeholders, with a means to make related decisions.

Information sources
The survey also sought to identify where investors sourced their information regarding M&A deals. The top company communication used is the company conference call at 75% of respondents, followed by press releases at 73% and meetings with management at 58%. In terms of third party communications channels, the biggest source is financial data from sources such as Bloomberg, at 76%, followed by sell side analyst reports, at 74%. Trade media coverage and general media coverage both come in at 52%. Social media is the least sought after source of information – at 15%.

The research further considered which factors lead to a successful M&A transaction. The top item, at 65% of respondents, is a well-priced transaction, followed by the ability to realise cost synergies at 63%. Strong financial rationale came in at 61%, followed by sensible strategic rationale. The area of least concern, although still at 42% of respondents, is the ability to realise revenue synergies.

In terms of specific factors that generate concern among investors relating to a deal, unclear strategic rationale comes in at the number one spot (75% of respondents). High valuation comes in second, as cited by 73% of respondent. Unclear financial rationale is cited as the third most concerning move, at 71% of respondents. Also of concern, but significantly less so, is significant regulatory or antitrust risk, at 46% of respondents. The area of least concern is high levels of media scrutiny, at 9%, and high risk of labour issues, at 24%.

Tust in deal outcome
Another area FTI Consulting looked into is M&A trust, with the study highlighting that confidence in the company marks a clear point of departure for them. For instance, 63% of investors are particularly keen that cost synergies are realised as part of the deal. If there is a lack of explicit synergies in the deal rationale – or there is limited rationale – then the investors’ implicit confidence in the company and it direction play a key part in their concern surrounding a deal. The survey finds that 46% are likely to be very concerned if they are not confident about the company’s capacity to successfully complete the deal, while 76% of non-confident investors viewing limited revenue synergies as a high concern. The research further finds that concern may also be generated if the confidence of investors falls partway through the deal – then so does perceived ability to achieve cost synergies.

According to the authors, “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.”