High values create M&A challenge for IR, survey finds

Corporate transactions pose many challenges for IR teams but, with company valuations at an all-time high, IROs may face an even bigger hurdle when crafting a compelling message to get shareholders on board for M&A deals this year.

According to a new survey by Merrill Corporation, these high valuations are the biggest challenge for corporate development activity, with 42 percent of respondents in the EMEA region citing this as the main obstacle to successful transactions. The poll, conducted during a webinar held by the virtual data room provider in January, asked corporates and advisers about their outlook for M&A activity in 2018.

‘You think sellers would take advantage of high valuations, but the flipside is the prospect of even higher valuations down the road,’ said Jonathan Rothenberg, senior vice president of corporate development and M&A at GlobalLogic, during the webinar.

The poll finds that a third of EMEA respondents are most concerned about political and regulatory uncertainty. So-called black swan events such as Brexit are viewed as the main threat by only 18 percent of those polled. US-based participants appear less worried about both issues, with 30 percent citing political and regulatory uncertainty and 9 percent citing highly unpredictable events as the greatest challenge.

Forty-five percent of respondents say corporations would most likely use excess cash to carry out a transaction, despite hefty price tags, although a quarter believe it would go to R&D and a fifth feel firms would return cash to shareholders.

‘We are not surprised to see high valuations as headwind for successful transactions,’ says Hilary London, Merrill Corporation’s chief revenue officer and general manager for EMEA, in a statement. ‘It is something our due diligence and regulatory reporting clients regularly mention. What is more interesting is to see EMEA respondents being far more concerned about political uncertainty and black swan events [than] US respondents.’

‘Our survey shows that 73 percent of poll participants believe industry expertise is required in choosing an adviser,’ Thomas Donnelly, CFO of Merrill Corporation, tells IR Magazine. ‘This also applies to the investor relations profession where detailed knowledge of key industry metrics is critical.’

With this in mind, IROs will need to keep abreast of shareholder views on the valuation level of potential acquisition targets. Verifying that investor expectations are in line with a company’s long-term strategy means being better prepared when an opportunity arises.

‘Ideally a company will have previously discussed its own M&A, including any acquisition criteria, so shareholders won’t be surprised by a decision to make, accept or reject a proposal,’ Joele Frank, founder and managing partner of Joele Frank Wilkinson Brimmer Katcher, told IR Magazine in a 2016 interview.