With 1,701 deals worth $362.3 billion announced in the first half of 2010, according to Mergermarket, it’s no wonder that covering mergers and acquisitions is an important aspect of business journalism.
Companies buy each other for various reasons. Maybe the acquirer wants to expand into a new market — either geographic or product. Maybe they’re looking to eliminate a competitor or purchase a smaller company with a stronger staff. Or maybe they’re just looking to satisfy Wall Street’s insatiable demand for growth.
Whatever the reason, M&A is big news. Witness the coverage of AT&T’s deal in March 2011 to acquire rival cell phone provider T-Mobile USA for $39 billion, which was front-page news across the country in March 2011.
Learning to write about deals can help a budding journalist obtain a job, as an understanding of covering these stories is a valuable skill. The M&A reporter at media outlets such as The New York Times, Wall Street Journal and CNBC are often the most visible bylines.
Here are the major questions that any M&A story should answer:
Who is buying whom?
Many times, the companies involved in a deal will announce their transaction as a “merger.” Don’t believe them. It’s often an acquisition. Mergers only occur when the shareholders of the two companies involved in the deal will each own 50% of the new company. Businesses use the term “merger” to make the employees of the company being acquired feel better.
If you can’t determine the ownership of the company after the deal closes, check to see where the headquarters of the new company will be located, what company’s board will have the most seats on the surviving company’s board and who will be the CEO of the company after the deal closes. These will provide key clues as to what company is the acquirer and what company is being acquired.
What’s the price?
The amount of money being paid for a company should be in the lead in any M&A story. But equally as important is how that price compares to what the company was valued at by the stock market before the deal was announced and how the price compares to similar companies. This gives the reader some context.
Let’s say Company A announces that it will buy Company B for $30 a share. If Company B was trading at $20 before the deal was announced, that means that Company A is paying a 50% premium — $10 more a share than what investors valued the company at. That number can tell you whether Company B’s board negotiated a good price for its shareholders.
Let’s say Company B is a hospital operator. If the total price of the deal is $500 million, and the company has 2,500 beds in its hospitals, that means that Company A is paying $200,000 per bed. How does that ratio compare to other hospital company deals? Answering that question for the reader tells them whether Company A overpaid or underpaid.
How is the deal being funded?
Companies can pay for other companies in different ways — cash, stock or debt, a combination of any of those three. How Company A pays for Company B can often tell the reader about something about the deal. If there’s stock involved, the value of the deal could change based on how the price of Company A’s stock moves before the deal closes. It also means that the current Company A shareholders will see their value diluted because new shares are being issued.
An all-cash deal often means that the owners of the company being acquired won’t be involved in its operation once the deal closes. They’re cashing out and moving on to something else.
Is the deal dilutive or accretive?
When Company A announces that it will buy Company B, it will typically say when the deal will add to its earnings and how soon. Investors in Company A would like to see deals that immediately add to earnings. If the company says that the deal won’t add to earnings for a year or two, that could mean that they’re overpaying or that it’s going to cost some extra money to combine the two operations.
What regulatory approvals are needed?
Deals don’t just happen in a vacuum. Other parties are involved, primarily regulators. The Department of Justice and the Federal Trade Commission review every single deal that’s proposed. And state regulatory agencies can also have a say. Often, competitors will file documents with these regulatory bodies that could shed some light on what others think about the deal.
The regulators may ask the companies involved in the deal for concessions before they approve the transaction. If a grocery store chain is buying another grocery store chain, and if the combined operation will give the new company a dominant market share in certain cities, the government may ask them to sell some locations to a third party before they approve the deal.
Don’t forget that each deal will affect employees. Often, workers at the company being acquired may lose their jobs once the deal closes. While the companies involved in a deal may not know how many will be cut when the deal is announced, they should have an idea before the deal closes.
And then there’s the executives. Many of them have “golden parachutes” that pay them millions of dollars if their company is sold. That could be the incentive to make sure the deal closes.
Chris Roush is the Walter E. Hussman Sr. Distinguished Scholar in business journalism at UNC-Chapel Hill. He can be reached at croush@email.unc.edu.
Photo by Cornelius of the Whitman Pioneer.
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