A recent blog from Freshfield’s Ethan Klingsberg offers up some predictions on M&A for the upcoming year. One that may come as a surprise to many dealmakers is his view that sellers should no longer assume that institutional investors will support a cash deal just because the deal price represents a nice premium over market. As this excerpt explains, a lot of this has to do with the price at which those investors acquired their positions:
We will be entering a different environment in 2023 – where long-term, institutional shareholders have acquired their shares over the last several years at prices that not only are significantly higher than prices that represent a healthy premium to current trading prices, but also far exceed the ranges where financial analyses of the newest internal, management forecasts are putting both intrinsic values and future stock prices.
Against this backdrop, we are not necessarily going to be able to rely on institutional shareholder enthusiasm for cash sales of companies just because the transactions satisfy the traditional criteria of meaningful premia to recent trading prices and falling within the ranges of intrinsic values and future stock prices derived from internal management forecasts. The uncertainty and downsides that will be characterizing the forecasts that managements present to boards at the outset of 2023 will be fueling this tension between the approaches of boards and the approaches of institutional shareholders to sales of companies in 2023.
The blog says that even companies with solid sale processes who have upgraded their shareholder engagement efforts, improved IR messaging, enhanced transparency about long-term targets and made timely, shareholder-friendly governance concessions may face real challenges in getting their institutional investors to sign-off on cash deals.
— John Jenkins, DealLawyers.com, January 13, 2023