By Lewis Krauskopf December 1, 2012
Reporters covering mergers and acquisitions rarely have to dig too deep to find compelling material. A big deal is by nature a dramatic event. Old corporate brands disappear. Jobs are moved or lost. Stocks surge or plummet. Someone typically makes a lot of money.
By extension, covering a merger demands the ability to write authoritatively about a wide variety of topics, including corporate finance, regulation, labor, executive compensation and the open market.
In many cases, how a reporter covers a deal has more to do with the publication they work for than the angle that interests them most. A markets blogger will want to dig into the pricing of the deal. A reporter from a local paper will look into what it means for the regional economy. The complete journalist should be able to do it all.
Here are a few starter questions to consider when covering a significant deal.
Why merge?
Why is the deal happening? Common reasons include entry into new markets, access to new products, expanded leverage over customers and suppliers and cost savings to make up for slowing revenue. The companies will typically provide their rationale in a release. Be critical of their reasoning.
Many companies promise new synergies, or benefits that yield more than sum of the component companies’ parts. Be skeptical about such claims and demand specifics. The merger of AOL and Time Warner failed spectacularly, in part because of promised synergies that never materialized.
Ask analysts who cover that industry whether they think the deal will accomplish its intended goals. If the companies say the deal will increase shareholder value – a common trope – talk to shareholders and get their view. If the deal is designed to improve the companies’ goods or services, ask customers or consumer groups for their opinion, too.
Who got the better end of the deal?
To assess whether a publically traded company was sold for too much or too little, look at the deal premium, or the difference between what the buyer paid and what the company is worth. Compare the share price announced in the deal with the stock’s last closing price. A 10 percent premium, for example, might seem cheap if it is lower than premiums for other deals in the same industry.
Another yardstick for measuring the value of a deal is the price-to-earnings ratio of the target company implied by the deal price. If a target company’s stock may have fallen in the months before it was acquired, it might seem cheap, but its price tag could still trouble investors if it isn’t making enough money. Do some back-of-the-envelope math to determine the company’s P/E ratio based on the price the buyer paid, and compare that number to P/Es of other companies within the industry.
Will the deal even happen?
A large merger typically needs to be approved by anti-trust regulators who must assess whether it will meaningfully impact competition. Check to see what regulators have said about prior deals in the sector. The Justice Department or the Federal Trade Commission generally sign off on deals in the United States. Deals with global consequences will draw the attention of regulators overseas. In 2001, for example, the European Commission scuttled General Electric’s $42 billion bid for the industrial giant Honeywell.
To get a sense of whether a deal will hold up under regulatory scrutiny, take a close look at how the combination of the two companies will affect market concentration. The Herfindahl-Hirschman Index is a common measure used by the Justice Department for assessing market concentration in antitrust cases. Read more about the index or calculate how any deal would affect the HHI here.
Because antitrust cases can turn on how a deal would impact a market’s concentration, companies are often at odds with regulators over the definition of the relevant market. Is it Houston or Texas? Television viewers or satellite customers? The difference could make or break a merger.
Who will be laid off?
When two companies combine, jobs are usually cut to eliminate redundancies. Shareholders typically want to see as many job cuts as possible to raise profit margins, so it is not uncommon for thousands of people to be laid off in a merger. Press companies about details. How many jobs will be lost? Which positions will be eliminated? Where are they located?
Ask whether plants or other facilities will be shut down. If a company moves its headquarters or shutters a plant, local reporters should ask whether the move will significantly reduce the regional tax base. Did the company receive a tax break when it first set up shop there? Talk to mayors or other local politicians to get their take.
Some of the most notable layoffs happen in the C-suite. Take note of which chief executive retains power, how many executives from their inner circle remain at the new firm and which company puts more members on the new board.
Who hit the jackpot?
Shareholders of an acquired company can reap massive windfalls from the deal premium. Find out who the top individual and institutional holders of the target company are, and try to get a hold of them. Some companies disclose their top institutional investors on the investor relations page of their website, but more comprehensive ownership information is usually available in the firm’s proxy filings with the Securities and Exchange Commission or on websites like Yahoo Finance that aggregate such data.
How did it all go down?
When interviewing the people involved in the deal, try to learn more about how it came about. Such details can provide color for the breaking story or be part of a “tick-tock” piece that tells the story chronologically. Keep an eye out for proxy filings or other regulatory documents that arrive usually within several weeks of the deal. They often contain newsworthy details, such as when the parties first contacted one another, who initiated talks and whether additional bidders were involved. Bankers and lawyers advising the parties may also be able to provide specifics. Companies typically say in their releases which banks and law firms advised them in a transaction.
Who’s next?
A natural next-day story is which rivals in the industry might now be pressured to make their own acquisition and which companies might be buyout targets. Watch the stock prices of rival companies when deals are announced. A big jump could signal the market thinks they’re next in line to be picked off.
Lewis Krauskopf is a Knight-Bagehot fellow. Before arriving at Columbia, he covered the health care sector for Reuters and the pharmaceutical industry for The Record in Bergen County, N.J.
This entry was posted on Saturday, December 1st, 2012 at 1:55 pm. It is filed under On the Beat and tagged with antitrust, compensation, corporate, deal, EDGAR, HHI, labor, M&A, merger, P/E, proxy filings, regulation, SEC. You can follow any responses to this entry through the RSS 2.0 feed.
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