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Jun 30, 2009

M&A focus: Tech and pharmaceutical takeovers on the rise

Technology and pharmaceutical takeovers are leading the way, but expect hostile activity elsewhere in the wake of Madoff and AIG scandals.

Technology and pharmaceutical firms have led the way this year in high-profile merger and acquisition activity, from Oracle-Sun Microsystems and Roche-Genentech to Pfizer-Wyeth and Merck-Schering-Plough.

In the last few months, we’ve also seen plays in other industries with DirecTV’s tie-up with Liberty Entertainment and Pepsi’s plans to integrate its bottling group.

The tip of the iceberg?
Given the frozen credit markets, it’s not surprising cash-rich tech firms were the first movers, and speculation still abounds about acquisition plans for Cisco, IBM, Microsoft, Dell and others that have overflowing war chests of cash. As credit markets thaw, however, several M&A observers tell us they expect a slew of new deals – many of them hostile – across many industries.

The elements of a perfect storm are in place: activists have successfully dismantled takeover defenses over the last decade; companies are trading at bargain-basement prices and money is pouring into new funds to capture ‘special opportunities’ in the market; companies are underperforming in the recession; and allegations of management incompetence, entrenchment or abuse – always popular in hostile fights – resonate even more in the wake of AIG, Madoff and other scandals.

Here is a checklist to help prepare for today’s M&A communications challenges:

  • Does Wall Street understand your corporate strategy? If influential investors understand your strategic plans to create value, they’ll have a better frame of reference when the deal becomes public. Their reaction can set the tone for others. This applies to acquirers that must persuade shareholders the acquisition will not destroy value; it applies even more to targets whose prospects for independence or a preferred alternative may depend on precisely how well investors understand the value-creating business plan.
  • Does a deal fit your corporate strategy? Your deal rationale should tie back to the strategies you’ve previously laid out. In fact, many successful acquirers articulate deal criteria beforehand so investors can use them to benchmark proposed transactions. If defense might be in your future, be aware that Wall Street may agree with your strategies but feel they are best implemented by someone else. Best practice is to assess management credibility with top holders and then address any perception gaps.
  • Does your story make sense? Too many M&A journalists complain of jargon-laden news releases. When you’re selling a deal, your success depends on whether your story makes sense to your stakeholders. We’ve seen investors befuddled because companies speak their own corporate or techno-speak, rather than the language of Wall Street.
  • Do you know where your friends are? If you’re in the spotlight, the best way to influence the media is to influence those who talk to the media. Plan ahead by knowing which influential third parties may support your point of view. A key part of any tune-up is to polish your relationships with industry analysts, major customers, media, top holders and others before a deal is imminent.
  • What about the day after? One lesson investors learned all too painfully over the past decade is that post-close integration is essential to a successful acquirer. Even on announcement day, investors ask probing questions about companies’ plans and capabilities to integrate the deal, especially if you don’t already have a long track record of successful acquisitions. The best plans communicate how you will retain customers and employees who are most at risk.
  • What might you change in the business? Hostile bids don’t always win, but most companies that face a credible attack either respond with important changes to their business or corporate structure, or lose their independence. Many of the smartest managements we know retain their investment bankers to do an annual assessment of strategic alternatives so these issues have been examined carefully before anyone shows up on the corporate doorstep. Furthermore, while protections aren’t popular with governance types, if you’re a likely target, have you asked outside counsel to assess and freshen up your defenses lately?
  • Do your shareholder mix and stock trading patterns provide insight for a communications strategy? We once worked for a publicity-shy company that wanted to ‘sell’ a major deal by talking mostly to its three very influential and large shareholders. As it turned out, none of those was likely to buy or sell shares on that day, and the stock’s thin trading liquidity meant that even the 30th largest holder – a hedge fund – could move the price. The successful strategy was to quickly reach everyone with all the details.
  • What are you doing to demonstrate management’s credibility? If you’re planning an acquisition, can you highlight your integration track record? If you’re preparing a defense, can you point to promises you’ve kept or actions that inspire confidence your plans are on track – and shift the burden of proof to the other side?
  • What is your leak strategy? Unfortunately, most deals leak these days, so acquirers should plan for the day their plans become the talk of outsiders. Potential targets should have policies and procedures in place so management, the board and employees know how to respond when the phone rings.

In summary, whether your company is potentially a buyer or a seller, the signals are clear: mergers and acquisitions will return and the prudent IRO should be prepared for the unexpected.

Ian Campbell is managing director for the west coast and Daniel Hilley is senior vice president at Abernathy MacGregor Group.