Investor Confidence Plays Major Role in M&A, Activism

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By Michael Greene

April 4 — Building up high shareholder confidence provides companies with more latitude to execute mergers and acquisitions and ability to stave off activist threats, a recent study suggests.

FTI Consulting Inc., which polled more than 300 institutional investors, found that respondents were 46 percent more likely to be very concerned about a transaction's cost synergies—the merged entity's ability to save on operating costs—if they were not confident in the company's ability to execute deals.

The top concerns for investors during M&A deals—regardless of whether they were confident in a company—were unclear strategic rationale (75 percent), high valuation (73 percent) and unclear financial rationale (71 percent), FTI's study found.

Low Confidence, Increased Activism Threat

The poll also found that when investors lack confidence in management, they are more likely to support an activist's demand that the company engage in a merger or acquisition, spin off or sell assets, change capital allocation policies or add new board members.

According to the report, the top factors contributing to shareholder support of activism include:

  • failure of management to improve financial performance (76 percent);
  • failure of management to execute strategy (74 percent);
  • unclear company capital allocation strategy (50 percent); and
  • unclear company growth strategy (38 percent).
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    In other findings, the report said the biggest generators of investor confidence are within a company's control. It said the top attributes that contribute to an investor's confidence in a company are:

  • execution of strategy (96 percent);
  • record of good financial performance (93 percent);
  • strong leadership and decision makers (90 percent); and
  • focus on delivering value for customers (89 percent).
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    Face-to-Face Interactions

    Meanwhile, the investors viewed company financial results conference calls (76 percent), one-on-one meetings (65 percent) and financial news and data services (47 percent) as the most important sources of information to increase confidence.

    “For investors, the most influential means of building and retaining confidence is through direct, face-to-face engagement, as well as through other forms of direct communication” such as conference calls and press releases, the report said.

    However, the report suggested that during a period of crisis or change, investors' opinions are more likely to be shaped by the media and other third-party sources. “[W]hen there is an issue like a crisis or regulatory change, investors will turn more to third parties then to the companies themselves to help them form an opinion on the situation,” it said.

    To contact the reporter on this story: Michael Greene in Washington at mgreene@bna.com

    To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com