Getting the announcement of an acquisition wrong can wipe millions of pounds off a company's value
Acquisitions are risky. A negative reaction from investors to an acquisition announcement can cause a company's share price to plummet. Months of work, expense and worry can be dashed in a day.
There are some scary examples. Hewlett-Packard (HP) bought software provider Autonomy in 2011 in an attempt to shift from hardware to software.
However, a botched integration led to 27,000 job losses, an $8.8 billion write-down, allegations of fraud and misconduct, and a $100 million lawsuit.
Finally, HP divested Autonomy in 2017, at a loss of $2.9 billion, no doubt heaving a sigh of relief that could be heard on the Moon.
On the other hand, getting it right pays off. When science and technology company Danaher bought the biopharma business from General Electric’s life sciences division for £216 billion in March 2020, the market loved it: Danaher’s stock rose by 8.5 per cent.
So, how can a firm ensure it's a Danaher and not an HP?
The way the deal is announced is crucial
The market is generally risk-averse, so the less risky it judges an acquisition to be, the better reception it will get, and the more likelihood a company’s share price rises.
The way the deal is announced – right down to the words used in the press release announcing the takeover – is critical.
To get the announcement right my research with Rick Aalbers, of Radboud University, and Killian McCarthy, of the University of Groningen, found it is important to follow these five rules.
1 Explain your motives
For investors the motive behind the deal is an important risk indicator – and some motives are seen riskier than others.
The lower the level of perceived risk and the higher the perceived benefits, the more a company will boost its chances of the takeover resulting in a share price rise.
Identify the motives clearly, even before the start of the takeover. That way, it can be announced clearly in any communications and in a way that increases the chances of a spike in the share price.
Motives generally fall into three groups:
- Exploitation: where the motives are financial, economic, strategic or aimed at building market share. In practice that could mean increasing size, cutting costs, or reducing tax exposure. For example, when French biopharmaceutical company Vivalis bought biotech firm Humalys, also based in France, in 2010 it said its motive was “to capture more value while increasing its medium and long-term cash flow generation without modifying its risk profile”. This is an exploitative move with a clear financial and economic motive.
- Exploration: those aimed at exploring new products, processes, technologies or markets, and takeovers aimed at learning. When Secure Computing Corporation acquired its rival CyberGuard in the firewall and content-filtering market in 2005, it said the reason was “to expand the geographical reach and the product portfolio of the combined company” – clearly exploratory in terms of geography and products.
- Ambidextrous: this is a combination of exploitation and exploration. This means that the cultures, structures and processes needed to achieve post-acquisition success are not only contradictory but must vary according to the mixture. Naturally, this is harder to achieve in practice and harder to explain clearly.
2 Play to investors’ preferences
Investors prefer acquisitions with as little risk as possible and see exploitation top of the list. This is how investors rank the motives, with the least risky ranked top:
- Pure exploitation
- Pure exploration
Research shows that an ambidextrous acquisition orientated towards exploitation will perform better than one that is leaning towards exploration.
The chances of a company’s takeover announcement resulting in good returns diminish as you go down the list – so mention exploitative motives before any exploratory aspects.
3 Be clear, precise and comforting
Make the motives clear and use words that comfort investors in corporate announcements.
Note that when Vivalis acquired Humalys it said it was “to capture more value while increasing its medium and long-term cash flow generation without modifying its risk profile”.
It actively addressed the issue of risk and dealt with it in a comforting way, saying, in effect, there’s nothing to worry about here.
And when US-based IT firm 3Com bought Nortel Networks' gigabit ethernet card business Alteon Websystems in 2000, it described its motive as “to strengthen its existing operations by making the company more vertically integrated”. The use of the positive word “strengthen” helps indicate that risk is reduced.
4 Mention the exploitative angles before exploratory ones
In 2001 healthcare publisher ADAM took over another US health website Integrative Medicine Comm “to gain access to the technology and intellectual property assets of Integrative Communications Inc (ICI) and to capitalise on ICI’s brand in the growing area of complementary and alternative medicine”.
This was an exploratory acquisition, but the announcement mentions the financial and economic benefits first.
Beware, though: our research showed that hi-tech acquisitions are not always about grabbing access to new technology, even though many commentators believe they are.
We found that innovation performance at the acquiring companies did not improve after their acquisitions, so consider this before any announcement.
5 Explain where the acquisition matches the activities of the core business
Here ‘where’ is not just about geographical location (though this may play a part in the perception of risk), but about which sector of the overall market the target company inhabits.
How closely is the target related to the acquirer? Investors’ judge potential for future performance to be higher where the target is in a closely related industry.
This is common sense – the further away the acquisition target is from the buyer’s ‘home’ sector, the less experience the buyer is likely to have in the new market. If a software company announced that it had bought a biscuit manufacturer, investors would naturally see that as risky.
If the deal takes the company into a new sector, or there is an element of learning involved, the press release should explain clearly how it benefits the overall business.
Whatever is announced, to keep the markets happy ultimately a company's PR department needs to avoid ambiguity, especially where there are mixed motives for the acquisition. And if they follow these five rules then a rise in the share price could well result.
Aalbers, R., McCarthy, K. J. and Heimeriks, K. H. 2021. Market reactions to acquisition announcements : the importance of signaling ‘why’ and ‘where’. Long Range Planning, 54, 6, 102105.
Bingham, C. B., Heimeriks, K. H., Schijven, M. and Gates, S. 2015. Concurrent learning : how firms develop multiple dynamic capabilities in parallel. Strategic Management Journal, 36, 12, 1802-1825.
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