Bluegrass Consulting: Blueblog

Friday: 03 December

It’s 3am. Lawyers and advisors of a takeover target sit squashed in a downtown hotel suite, empty coke cans and coffee mugs litter the room while reams of paper are poured over. Across the hall in a bigger suite the acquirer’s team of lawyers and advisors check emails and wait for phone calls from across the hall for more documentation. This is the mergers and acquisition (M&A) process as described by a bank lawyer friend of mine.

Call it what you will - a friendly takeover, synergy or absorption, this is one of the most exciting areas in business. M&A experienced a massive slump as a result of the global financial crisis when the CFOs clung onto their balance sheets like castaways on a raft. Now as we move into the “new normal” (thank you McKinsey &Co) where money is more expensive but more available, M&A is again on the rise - and a good a communications strategy around the practice can mean short and sharp success.

There have been many cases where poor communications on a merger has led to its near collapse or value depreciation. Financial journalist Steve Lipin uses the examples of Hewlett-Packard’s acquisition of Compaq, Conseco’s acquisition of Green Tree Financial Corp. and Newell’s takeover of Rubbermaid Inc as examples earlier this decade.

These companies’ employees and shareholders experienced long periods of uncertainty with minimal communication from management, executives or the board. They filled the void by circulating rumours and myths about the situation, which either led to the transaction’s collapse or dramatically reduced the acquirer and takeover target’s value. The above organisations relied on their lawyers and advisors to contract out communications. No offense to lawyers but they are best to stick to the detail and shouldn’t be concerned with top line positioning and key messaging.

It is absolutely vital that both the acquirer and takeover target have in place a co-ordinated communications plan months before any announcement to help fill the vacuum and begin to influence the decision makers.

Treat it like a political campaign. You are dependent on a group of stakeholders on your survival - and if you don’t convince them that your way is the right way you will be forced to abort your mission.

At the centre of the campaign are a few must haves:

1.     Do you have a credible story, with clear targets, that can be communicated, accomplished and monitored, over time, by the acquirer and investors?

2.     Does your story remove uncertainty and give direction to the organization so that employees can effectively deliver?

3.     Does your story link post-merger integration plans to the economics of the transaction?

(Thanks again to Steve Lipin for the checklist)

Takeover targets want to know one thing: what is in it for them? Will my job be safe? Can I get a pay out? Will my shares go up or down?

A communications plan will help executives and the board answer these questions from stakeholders. They will uncover issues that are usually an afterthought in the heat of due diligence but are typically the ones that can make or break a merger. These issues usually come from concerns from employees and shareholders so they must be top priority in any communications planning. And don’t forget, most employees are shareholders too!

M&A communications is a beast all onto its own. It can be aggressive or subtle, yet always highly strategic. Getting good advice and a good plan early is paramount for any successful transaction.

Heather Gilmore

Heather is a communications consultant, former Senior Manager at Westpac and media advisor to a NSW Premier and Treasurer. She is also an Associate Account Director with Bluegrass Consulting. Heather’s blog is at hgcommunication.com

Tuesday: 10 August

After the subprime crisis inflicted a strong blow to Western economies, the European Union and the United States have been trying to catch their breath and continue to reform their respective financial sector according to their own beliefs.

The validation by US Senate of President Obama’s financial reform is undeniably a great move forward. However more has to be done, in particular on an international scale with the harmonization of reforms of the functioning of the banking system.

The Global Financial Crisis (GFC) put bank bonuses under the spotlight. Indeed, the latter were responsible for encouraging financial actors - mainly traders - to take highly risky short-term positions that threaten the stability of the entire banking system.

To avoid the international financial system falling like a house of cards once again, both the US and the European Union have decided to take strong contradictory measures.

In essence, the EU intends to introduce by January 2011 measures that should increase the difficulty for bankers to gather bonuses. Moreover, securities - share included - would have to make up 50% of all immediate bonuses.

Meanwhile, the US has opted to put in place directives on top management’s salary and bonuses.

As a result, traders will have to choose between these two systems, and the absence of consensus will keep on curbing the general process of reforming international finance.

While the US and the EU have been trying to find the best way toward recovery, Asia has continued its impressive rise, as if the GFC never happened.

Singapore’s GDP rose by 16% between January and April 2010, and a rise of another 13% to 15% is anticipated for the rest of the year.

As for China, it has been confirming its impressive two-digit pre-GFC economic growth. Despite currently experiencing a slowdown and being forecast to fall to one digit, its growth remains very competitive compared to Western growth estimates.

Moreover, China has ideologically challenged the US and the EU. On the 12 July, a prominent Chinese credit rating agency downgraded the AAA rating of Germany, the US, France and the UK, blaming the “big three” (Moody’s, Fitch, Standard and Poor’s) for their ideological support of Western economies. By taking this step, China has openly contested the hegemony of the “big three”.

It is now obvious that if on the one hand the GFC has demonstrated the huge vanity of the Western world, it has on the other hand accelerated the rise of Asia. To put it into Dominique Strauss-Kahn’s words, “Asia’s time has come.”

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

Thursday: 08 July

Lately, there has not been a week without a warning or a cut in the credit rating of European countries, worsening their financial situation and bringing the reform of credit rating agencies back under the spotlight.

After having been accused of being largely accountable for the global financial crisis (GFC), Moody’s, Standard and Poor’s and Fitch (the ‘big three’) have simply and unapologetically returned to their daily grind with seemingly intact legitimacy, their usual aura of infallibility and -above all- influence remaining in. It is as if they had never contributed to what has been the most important financial turmoil since the Great Depression!

In his column in the New-York Times Paul Krugman stresses that the examination of e-mails exchanged by employees of credit rating agencies reveals a ‘deeply corrupt system’, in which issuers of debt hired the credit rating agency which gave the best rating to their debt. The ‘big three’ consequently distorted their notations to satisfy their clients, and 93% of the subprime-mortgage-backed securities that were rated AAA in 2006 were in fact ‘toxic assets’.

It did not take more for some scholars and politicians to argue that the ‘big three’ work in favour of Wall-Street and, more generally, in favour of the United States. On Tuesday 15^th June the members of US Congress did not ratify the Franken amendment, which resulted into a terrible status-quo as the purpose of the amendment was to implement conflict interest rules for the rating agencies industry. This non-ratification clearly shows the huge influence of financial industry lobbyists on Congress.

While arguing that the ‘big three’ work in favour of Wall-Street may be considered extreme, it is true that they are maintaining a climate of uncertainty over financial markets at a time when the latter are afraid of their own shadows.

In the early stage of the European debt crisis, Standard and Poors’s downgraded Greece’s rating and put the already weakened country into a highly critical situation. At the end of May, Fitch in turn cut Spain’s rating. On 15^th June, Moody’s downgraded the sovereign debt of Greece to junk status just as Greece had concluded a macroeconomic policy agreement with the European Commission, the European Central Bank and the IMF.

The timings were rather well-chosen - or badly-chosen, depending on which side of the Atlantic you stood. Good times for speculators of the US financial sector indeed mean bad times for Greece, Spain and Europe in general.

Lately there has been a will both in the US and Europe to break the oligopoly of the ‘big three’ and to increase the transparency of their functioning.

In early June the US Security and Exchange Commission introduced the rule 17g-5, which requires that the information used for rating be available to all rating firms.

The European Commission took a similar decision in order to increase competition and plans on creating a new pan European Union regulatory body that would supervise the operations of agencies.

However, it is still unclear who should funds rating agencies or how ratings should be assigned. The key issue remains unchanged i.e. issuers of debt will continue to pay for ratings, and it is unlikely that investors will be the ones to pay.

Reforming credit rating agencies is crucial, and urgent. In the short- to medium-term, the absence of any restructure could threaten the economic recovery of Europe and could compel countries to leave the Euro-zone. In the long-term, it could possibly generate another GFC.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.

Wednesday: 02 June

The global financial crisis has had many economic, financial, social and political consequences. And, surprisingly, it also made both A. Merkel of Germany and N. Sarkozy of France partially amnesiac.

On the one hand, it took A. Merkel almost an ‘eternity’ to agree onto Germany’s contribution to the Greek bailout plan. While it is true that A. Merkel was more preoccupied by crucial regional elections in North Rhine-Westphalia, she should have considered reassuring financial markets instead of frightening them. In the end, her party lost the election and now markets continue to stagger.The chancellor was too quick in forgetting the major political role played by the European Union during the reunification of Germany as well as the great economic contribution of the euro to the country’s recent prosperity.

On the other hand, N. Sarkozy, a former law student, would like to amend the French Constitution with the view of setting limits to public debt. Regulating public expenditure is of utmost importance but modifying the Constitution certainly is not the right means to that end. In essence, the purpose of a Constitution is to define the frame in which public policies should be implemented and not to specify the contents of public policies. N. Sarkozy is clearly making deficits a national issue although the stability pact is already meant for this.

These two testimonies of memory loss epitomize the impossibility for the European Union to achieve more than an economic and monetary union. With national interests keeping the upper hand over common interests, a genuine political union is sheer fantasy.

Arnaud Eard

Arnaud comes from Paris and gained a MA in International Political Economy at the University of Sheffield. He has been interning at Bluegrass Consulting since May 2010.