Investor Communication

When transaction activity violates traditional norms---the divestment of an underperforming division for less than the company’s valuation multiples, the purchase of an acquisition on an EPS dilutive basis, etc., it is critical to communicate the logic and the math of the transaction to buy-side analysts and investors. Since Devon’s value curves are derived entirely from empirical investor behavior, our models are often useful in convincing skeptical investors that “non-traditional” transactions can be highly value accretive on a cash profitability basis.

In a recent case, the client’s investment banks were reluctant to support acquisition strategies because the client’s average profitability was below the cost of capital and the sell side analysts were urging the divestiture of divisions and product lines that were not ready for optimal divestiture pricing. Devon’s solution was to divide the company into “value” segments and integrate this perspective into the investor relations materials used by the company to explain that the ground rules under which acquisitions would be considered precluded the classic “good money after bad” pattern typically found in acquisitions undertaken by companies with low levels of cash profitability.

A new CEO was determined to change the scale of acquisitions from small family owned niche companies to larger companies with higher technology content. The push back from sell side analysts was annoying, but the concerns of buy-side analysts and investors required urgent attention. Explaining the value accretive math of his acquisition strategy, the CEO bought time. When his first acquisition increased cash profitability by 20%, the CEO spelled out the accretive math in great detail. The share price responded positively and the company’s value has increased by 20% per year after a dozen value accretive acquisitions.