Mergers and acquisitions (M&A) are a key component of corporate growth and exit strategies, and M&A deals could fall by half this year, according to a Morgan Stanley study, with increases expected across a range of sectors including banking and real estate.
Rising business confidence and easing inflation have already driven a 36% increase in global deal value in the first quarter of 2024, but these deals are increasingly being threatened by activist investors who could block, delay or test boardroom activity.
Diligent research found that the number of contentious cases increased 20.8% in 2023, with activist arbitrage being just one of several tactics disrupting deals across industries ranging from medical technology to energy.
But the situation is not hopeless. By leveraging cutting-edge institutional ownership information (Oi) to understand exactly which investors are active, combined with targeted shareholder engagement to gain the support of skeptical shareholders, leaders can significantly increase the success rate of even the most complex M&A transactions.
Institutional Investor Ownership Information
Oi is streamlined market surveillance that identifies and tracks true institutional investors who hide behind custodians and hold a direct economic interest in the stock. Oi can make or break an M&A deal. While many companies claim to know who owns their stock, in an M&A transaction, companies can literally see their shareholder profile change overnight and continue to shift with news cycles and external market factors. By helping management and the board know who owns their company's stock and how many shares they hold, they can proactively alert potential activist investors and keep a pulse on the stock. This provides an opportunity to address potential issues and develop strategies before the M&A vote, while also providing insight into the market's reaction to the announcement.
Many companies rely on outdated Form 13F filings and expensive, mediocre results from legacy providers that report in hindsight and aren't equipped to handle today's fast-paced trading environment, which is especially problematic in a market where institutions own roughly 78% of the shares of Russell 3000 companies.
There are other obstacles to successful M&A, such as share lending. In this $10 billion industry, many shareholders have less voting power than their nominal shareholding would suggest. Management may believe that voting power is in the hands of “management-friendly” shareholders, but in reality shares are being lent out to short sellers, reducing the number of shares available to vote for management. Knowing this up front is crucial for tough M&A proxy voting.
Adam Riches, senior managing director at Alliance Advisors, says so-called “bumpitrage” is a tactic that's on the rise across M&A, but it's largely unhelpful: Activist investors essentially buy shares in a target company and then argue the offer was too low, delaying some deals and stalling others outright.
Leveraging tens of thousands of solicitation campaigns per year, Alliance Advisors' Oi service provides a detailed database mapping investor and custodian profiles, including data on short sellers across sectors. Even before a deal is announced, Oi helps companies predict how major shareholders will react, based on both their activist history and current shareholder profiles.
Once M&A plans are made public, Oi becomes even more important as it continually logs shareholder analysis to help companies gauge market reaction to the news and prepare to solicit future votes.
While Oi is a critical part of the process, its real value lies in its integration with other shareholder management tools. For example, if Oi alerts a company to an investor with a history of blocking or disrupting M&A, the company can immediately engage through meetings and proactive shareholder communications to address concerns proactively. If Oi uncovers stock lending or bumptrage, leaders can immediately realign required votes.
Oi also provides more comprehensive insights, such as whether shareholders are truly at risk of voting against a resolution or are simply dissatisfied at the moment. In addition to providing peace of mind to executives and directors and preventing costly M&A failures like those experienced by Brookfield and Abrdn, strong Oi can also enable boards to keep shareholders happy even after the initial merger is approved. This approach is essential, given that M&A is only the first step toward a long-term, successful partnership.
