Middle Market M&A Driving Growth: Are Your Communications up to Snuff?

Maybe it’s not the mega-merger that lands above the fold. But that doesn’t mean the communications around a middle-market transaction are any less important. In fact, many times they are more important as it’s usually part of a broader strategy that will include a series of bolt-on acquisitions that will drive your company’s future growth. While less financially and operationally disruptive, they are often very strong proof points for the execution of your strategy.

So who would benefit from advanced messaging around smaller deals? Of course, investors are a key stakeholder group when communicating any deal of magnitude. But your employees, customers, suppliers, and the media should take the forefront when drafting your communications as well. Consistency, with subtle refinements, is critical as you prepare your communications.

Communicate a Strategy Early and Often

Communications around a strategic transaction start long before a deal is announced. To ensure you receive full value, your process should start by communicating a long-term vision of the company and how acquisitions, large and small, could play a part in advancing your strategy.

Your investor relations professional is a big part of this process. They have a gut on how the deal will be received by the Street, if it will be perceived as aligned with the current strategy, and what the Street will think about valuation. Don’t make the mistake of bringing them in late to the process.

As you craft the investment narrative around the company’s strategy, it’s important your team is communicating the vision, as well as how you are advancing your strategy quarter-to-quarter and supporting management as strong stewards of shareholder capital. With that in mind, some of the key questions you need to be asking are:

• How will investments for organic growth intertwine with acquisitions?
• What are the financial metrics management will use to evaluate acquisitions?
• How does management determine capital deployment in areas of the business expected to deliver the highest risk-adjusted returns?

You’re nearing the finish line on a transaction – you’ve done the initial due diligence and understand the strategic rationale as presented to the Board of Directors. What’s next?

Starting from a common place is critical. Draft a messaging platform that outlines the key takeaways of the transaction and resonates across key stakeholders. This platform will inform the rest of your communications. It also allows you to focus the team on how you will communicate the deal more broadly. From an investor perspective, they want to understand the merits of the deal strategically and financially. For employees, how will this transaction impact their day-to-day? Do the synergies you outlined for the investment community mean headcount reductions at home base? And for all, it’s tying the announcement back to the promised growth strategy.

Context is King

Once you have a bird in hand, linking any potential transaction with your long-term strategy is critical. Crafting messaging around the deal that speaks to investors and other stakeholder concerns while articulating how the transaction aligns with the company’s long-term goals is table stakes. It’s essential to clearly convey the value proposition for stakeholders up front and how you will measure its value over the long term. On the employee side, keeping your team engaged to drive superior execution around the integration becomes the long play. You must paint a clear picture of how the transaction furthers the company’s growth plan and complements the overall corporate and investment narrative. Illustrate, in as much detail as possible, anticipations for the financial impact and operational synergies the business hopes to achieve as a result of the transaction and describe the benchmarks you will use to measure and gauge success along the way.

Common landmines for companies could include:

• Valuation – Smaller deals sometimes come with higher price tags, and the gap between expectations and actual multiples needs to be addressed.
• Outlining the growth and profitability profile of the combined business – Are the margins different? What are your synergy expectations? Can you – and should you – quantify revenue synergies?
• Shifting guidance policies – How will you communicate your expectations in the interim between the announcement and closing of the deal? How will you treat guidance after close, particularly if the timing of the close creates partial periods?
• Close communications – When will you provide an updated picture of the financial profile of the combined business? Will you report its contribution or roll it into a current segment? How will you redefine your longer-term targets?
• Unanticipated integration issues and costs – While the integration of the business should prioritize employees, particularly at close and in the intermediate future, astute investors are trying to find the areas that may cause headwinds for the acquiring company, such as partner relationships. Are you communicating rational assumptions that may increase integration costs, i.e. risks associated with large-scale IT integrations, cultural synergies, etc.?
• Cross-border transactions – How are you communicating the complexity of the deal structure? How are you managing varying investor stakeholders in a tender offer situation?

The Real Work Starts After the Ink has Dried

Plan your post-deal communications strategy ahead of the transaction announcement. From an investor perspective, some who initially have concerns about the deal, or different ideas on the approach you should take, may be willing to wait and see how things pan out. For these investors in particular, ongoing communication is a must. Regularly sharing news of progress and key milestones will keep all investors engaged and serve to maintain and build confidence in the management team’s approach.

Transactions of any size could trigger a radical change in a company’s shareholder base, for several different reasons, from a current group of long-term oriented shareholders to short-term event-driven investors and, ultimately, to a new set of long-term investors. For example, many funds have financial leverage guidelines that may trigger the liquidation of a position, even though the acquisition may make strategic sense. Or the institutional investors within your base may not have the appetite for higher risk. Managing this transition is critical. Management needs a clear understanding of who is in your base, the current sentiment, and how these investors might react to such a transaction. As a result, the transition can be supported by identifying those investors at risk of selling and those who could support the company through its transformation.

On the employee side, transparency and consistent communications are the secret sauce. Who is leading the integration? How will you leverage the expertise on each side and where there are opportunities for further advancement?

Summary

At the end of the day, communication is the glue that will hold all the parts together as you navigate a successful transaction. Bring in an advisor who knows the investment story and can staff smaller deals– one or two extra pairs of hands instead of a SWAT team that takes over your offices. Keep costs down, but don’t lose the opportunity to reinforce strategy. And finally, create a culture of transparency that instills trust and creates buy in — which in turn will push it over the finish line.