M&A Deals

Activist Investors and M&A

M&A deal making, over the years, has been affected by activist investors. This is particularly true for financial sponsor buyers such as private equity firms. In most cases, financial sponsors are more sensitive to changes in the valuation for a target company as compared to strategic buyers. There are two primary reasons for this. First, the shorter investment horizon for financial buyers makes it difficult for a financial buyer to add enough value and to sell out with a gain within three to five years. Strategic buyers, on the other hand, are usually making acquisitions for the long haul, which means they don’t have to face that issue. Second, strategic buyers are able to achieve economies of scale on many fronts, which means they can afford to pay more, up-front, for the target.

Activist investors have deterred some financial sponsors or private equity firms from completing M&A deals by bidding up share prices of target companies that the activist investors view as too low. Run ups in the share price of potential target companies makes acquisitions too costly for some financial sponsors, thus discouraging M&A transactions. While strategic buyers have proven to be more flexible in purchase price, they too are finding it harder to complete deals where activist investor presence is strong. The activist investors’ demand for a higher purchase price has made obtaining shareholder approval to complete an M&A transaction more challenging.
The key to getting M&A deals done amidst strong shareholder activism is through detailed target selection and management’s need to pitch the deal to their shareholders from inception. These are not easy tasks and having an experienced financial advisor to guide the management team through the M&A deal is invaluable. An investment bank with decades of experience will be better suited to help management successfully complete an M&A transaction even in the presence of strong shareholder activism or other challenges.