Mergers and acquisitions (M&As) always attract headlines, but could investors glean more than just news updates from the financial press releases published during a deal bid? Some academics believe they can.
Investigations by a team from France, Italy and Australia have found that sentiments expressed in press statements by a target firm during an M&A process can be a good indicator of how well a takeover bid will go.
More “positive sentiment” in press releases from managers at a target business can increase the firm’s stock returns. Disagreement in statements written for reporters “lowers the likelihood of merger success and increases the time to deal completion”.
Meanwhile, the team found that positive press releases from acquirer firms appear to make little difference to stock market returns. This is because acquirer CEOs may be viewed as deliberately ramping up the good news about the benefits of a deal.
“Our results show that initial M&A announcements provide valuable information which can be obtained in particular from their sentiment,” the researchers write.
There is even a suggestion that the tone used in press releases may be an indicator of a deal’s success.
Sentiment in financial press releases
M&A deals attract much attention from journalists, particularly when they involve large organisations; even more so when a target firm appears to resist a takeover or casts doubt on its value. Handling the press has become an integral part of the process potentially involving not only company managers, but also public relations professionals.
The research team looked at 2,944 US M&A deals announced between 1995 and 2020 and examined the language (words such as “believe” or “excited”) used in press releases associated with each deal to give them a positive or negative sentiment score.
But why do firms use positive or negative sentiment? The researchers wondered whether the percentage of stock involved in the purchase offer for a takeover might be a driver of sentiment in public statements, or whether a “friendly” relationship makes a difference.
They also asked whether the confidence of the CEOs involved is significant. It turns out they do. the researchers found that CEOs at target businesses tend to use unadorned “deal fundamentals” in their press statements. What might be considered plain speaking elsewhere. But acquirer CEOs are different. CEOs attempting a takeover, especially those designated with “low confidence” but owning a substantial stock holding in their companies, may want to protect the value of their shares.
“These CEOs are therefore encouraged to strategically use more positive sentiment to reduce investor concern on the M&A deals,” write the researchers, who believe this is the first investigation of M&A press releases and the effect they may have on deals.
The report will make interesting reading for target boards, who may wonder whether their acquirer is overstating the benefits of a merger. Investors too may ask themselves whether they should believe the hype coming from some chief executives about merger proposals. After all, the researchers appear certain that information in some press releases is “uninformative and biased”—a good reason therefore to be cautious. They suggest regulators may be interested too.
Merger deals are always fraught, given the the big money involved and the very public nature of the deals. This latest research may shed some light on playing the press during a deal and whether the statements made are worth heeding.