JPMorgan's US M&A chief shares how the role of investment bankers is changing as deals have become more high-stakes
- The first half of 2018 was a record for dealmaking, with $2.5 trillion worth of mergers and acquisitions.
- Yet the market remains skeptical, and not all deals have been greeted with approval from investors.
- Anu Aiyengar, the head of M&A in North America for JPMorgan Chase, told Business Insider that messaging around mergers and analyzing a company's investor base has grown increasingly important.
- Companies used to tightly guard their M&A strategy, but times have changed, she said.
- In a recent interview, Aiyengar discussed how M&A strategy has changed, why the bank is spending more time coaching clients on messaging, and why it gives them an edge in the world of dealmaking.
Halfway through the year, 2018 has been the hottest for mergers and acquisitions on record.
Global economic expansion, a friendlier corporate tax regime, cheap lending, boardroom confidence, and a sense of urgency thanks to the looming threat of industry-upending tech giants has led to $2.5 trillion in announced deals worldwide through the first two quarters, according to Thomson Reuters data. That's a 61% increase from 2017.
But despite the frothy environment, companies aren't getting a free pass to spend frivolously. The market continues to greet deals with scrutiny, and M&A that seems too expensive or doesn't make enough strategic sense has flopped when it crosses the finish line.
Take General Mills, for instance, which received a cool welcome from analysts after announcing in February it had bought the high-growth pet food company Blue Buffalo for $8 billion - about 25 times EBITDA. The cereal maker's stock slid more than 7.5% in the ensuing three days of trading.
More recently, asset management giant State Street saw its shares plunge as much as 9%, the most in nearly three years, after buying financial data firm Charles River Development for $2.6 billion.
"The market is much more discerning in terms of evaluating M&A deals - not every deal gets a positive reaction," Anu Aiyengar, the head of M&A in North America for JPMorgan Chase, told Business Insider in a recent interview at the bank's midtown headquarters. "If investors like a deal, the acquirers' stock goes up; if investors don't like the deal terms or don't understand the rationale, the reaction is negative."
JPMorgan has been one of the most active M&A advisers in the first half, orchestrating 176 deals worth $554 billion, good enough for third place behind Morgan Stanley and Goldman Sachs, according to Thomson Reuters.
In Aiyengar's territory of North America, the bank worked on nine of the top 20 announced M&A transactions in North America.
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And increasingly, under her watch, the firm finds itself spending considerable time advising its clients on messaging and cultivating their investors long before a deal is in the offing, so as to avoid a sloppy landing once a hard-won transaction is finally announced to the world.
"The importance of corporate communications is at a totally different level today," Aiyengar said. It's also grown more complicated and high stakes with activist investors constantly prowling and even passive managers, like BlackRock, becoming more likely to throw their weight around and less likely to rubber-stamp boardroom strategy.
Analyzing the investor base and developing thoughtful, well-communicated acquisition strategy is an obvious tactic in Aiyengar's mind, yet she says it's not common practice among Wall Street investment banks, which may be because historically companies have kept the secret sauce of their M&A strategy tightly guarded.
But times have changed, and that approach no longer adds up, she said.
Aiyengar recently discussed how M&A strategy has changed, why the bank is spending more time coaching clients on messaging, and why it gives them an edge in the world of dealmaking.
The following has been edited for length and clarity.
What role does messaging play in successful dealmaking?
Communicating M&A strategy and broader investor communications has become much more complex. Companies need to think proactively about messaging and preparing the investor base. If the company strategy is appropriately communicated and the investors understand it, then when a deal prints, investors say, "I get it, it's consistent with what the company articulated as part of their strategy." When the deal is consistent with strategy and well explained, there's no reason the market shouldn't react favorably, even if it's a dilutive deal. But if a company surprises an investor, and announces a deal that is not part of their communicated strategy, then they significantly enhance the risk of a negative market reaction. The importance of corporate communications is at a totally different level today.
What role do JPMorgan's investment bankers play in this?
We spend a lot of time discussing corporate communications and preparing the investor base with clients. Some companies might spend a lot of time on a press release, but in our opinion, a press release is almost too late to start the dialogue. Is the investor base well prepared - when the deal crosses the ticker tape what's the instinctive visceral reaction? As in: "You did what?" or "Oh, we understand." It's sometimes as simple as that.
To an extent, if a stock is in an index, it's more complicated to exit. In some ways, some of these reactions may be muted because there's more passive holding. Investors have to look stock by stock at what their passive-active mix includes - it's a more nuanced analysis.
And how much work are you guys doing for clients on understanding that investor base and in doing that nuanced analysis?
Often when we're working with a company for a long period of time, we help them shape their communications in advance of an M&A deal. There is greater importance on what a company discloses in a public setting - earnings calls, analyst and industry conferences. If a company consistently delivers the same message, it will not be a surprise when they act in the future. For example, if a company states they are looking for growth, possible global expansion, as well as exploring ecommerce and end up paying up to do one or all of these things, it doesn't come as a surprise to the market because they've articulated it previously.
So why isn't this practice already widely adopted?
Historically companies believed in never discussing their M&A strategy in a public setting. Sometimes companies might be concerned of discussing possible M&A and not executing a deal. This concern was more relevant when the potential M&A transactions were obvious. In today's world of disruptive cross-sector deals, companies are not really showing their hand by articulating the core principles of their M&A strategy.
Companies can talk about their M&A strategy without having to be specific - you can have several qualifiers in the message to be clear that company is exploring these strategies (not committing to do a deal) and will be disciplined in its approach (will be focused on shareholder value creation).
Is this specific advice different from what other banks are providing clients?
Yes, it is. Some companies view investor communications as the investor relations or IR job. In our view, that shareholder communications need to be at a different level with full engagement from the C-suite. It is the public face of the company and its strategic direction, and the CEO and the executive management team have to be integral to the strategy and participate in the discussion.