A failure to communicate

When investing in underperforming or distressed entities, having a solid communications plan isn't just gravy; it's critical to a successful operational turnaround, ultimately increasing valuation and improving exit options. By Sage Baker of FD.

Sage Baker manages West Coast operations for FD, the strategic communications division of FTI Consulting. She is based in San Francisco.

Strategic communications is the single most overlooked element in a private equity firm's acquisition of a distressed or under-performing company. While private equity firms would never invest in a new asset without conducting extensive due diligence, few consider how communications with important internal and external audiences will impact the value of that asset throughout the investment cycle. Communications can be especially impactful in down markets like this one, where many companies are distressed, underperforming, or otherwise valued at a discount. For many private equity investors, protecting and enhancing enterprise value in this complex world has become a primary focus.

Communications and the value of intangibles
Failing to communicate to already concerned stakeholders can leave them to draw their own – and often wrong – conclusions about both the value of an asset and the effectiveness of a potential turnaround strategy. Studies have shown that investors reward companies based on the strength of intangible assets, such as solid brand reputations, credible long-term growth strategies, and capable management teams. While current valuations have fallen as a whole, private equity firms still have the ability to maintain and create value in a portfolio company's intangible assets, which are not marked to market in the same way as hard assets. Communications strategies that build and reinforce the value of these intangible assets with stakeholders are a key element in maintaining and increasing valuation for a corporate entity as a whole.

A 2003 study by Ernst & Young on how value affects institutional investors' decision-making indicated that non-financial factors account for 35 percent of a company's valuation by these investors. Similarly, a 2008 study titled the “Hidden Value of Intangible Assets,” compared the market value to the book value of 3500 US companies from 1978 to 1998. Results showed that in 1998 book value accounted for only 28 percent of market value – highlighting the importance of strategic intangible components for these businesses, such as corporate reputation, in order to account for the remaining 72 percent of value.

Midwest Airlines' recent battle against a hostile takeover led by AirTran highlights this positive correlation between strategic communications and valuation. Although AirTrain's bid represented a 37 percent premium over the 30-day average closing price of Midwest Air Group's stock, MidWest firmly believed that the price undervalued the company as management executed against its long-term business plan. The airline undertook an aggressive communications campaign that told stakeholders exactly why the airline's long-term plan, independent business model and leadership made the company more valuable than AirTran's offer.

MidWest successfully targeted institutional and retail shareholders with strategic calling campaigns, shareholder letters and mailings, ads and presentations. While Midwest lost three board seats to AirTran nominees, the outpouring of support at the annual meeting was notable, and the airline was still able to pursue other strategic alternatives to the AirTran takeover. It eventually accepted a higher buyout offer from TPG, which maximised MidWest's value and allowed the airline to remain independent under private ownership.

Communicating through a turnaround
Communicating strategic changes to key stakeholders at every phase of a turnaround – from the initial investment to the exit – aligns stakeholders' interests with the company's new direction, dispels harmful rumors, garners support for difficult operational and financial decisions, and sustains investor confidence.

Despite these advantages, most private equity managers today do not consider proactive communications to be a strategic component of a turnaround. Many assume that strategies and messages will be communicated as part of the implementation process. This underestimates the value of communications and overestimates the ability of the organisational machinery to deliver the right message to the right constituency at the right time. Time and again, companies even as substantial as HP, Ford, Sears and Kodak have seen strategic initiatives fail from a lack of understanding, commitment and follow through by the organization and key stakeholders.

Setting the tone through media relations
When used effectively, media relations can be a key component to communicating and sustaining value through the various phases of a turnaround strategy. During a transaction a partner of a sizeable private equity firm recently said to me that he didn't want to bring communications into his firm's acquisition of a distressed asset because “the media will write what they want to write – we can't change that.” In fact, the opposite is true, and any piece of responsible journalism will include various angles on the story, if they are made available.

Many times, transactions or strategic turnarounds are considered to be newsworthy, and the media will cover a newsworthy story regardless of whether company spokespeople choose to participate. Media may use third-party sources or general industry experts to speculate on anything from negotiations to management's strategy and possible layoffs. Therefore, it is generally in the best interest of the company to plan ahead, develop a meaningful communications strategy and the associated messaging (within legal limits) to proactively engage the media once the investment is made public. This sets the tone for the transaction and ensures that the messages the media conveys to stakeholders are supportive of your strategy and in your (and your stakeholder's) best interest.

While media interest can range from local newspapers to trade publications or national dailies, it is important to remember that nearly every publication now has a digital presence and databases of articles are ready accessible. This means just about any news story – even from the smallest local daily newspaper – can be accessed very efficiently by anyone in the world. Feeding into the digital media machine are also blogs and social media. These include journalistic blogs that are divisions of major news organisations as well as comments and opinions posted by casual industry observers. While blogs and social media have long been used as a forum to voice concerns or start rumors, traditional media has increasingly been turning to these sites as a way to generate ideas for new stories. Furthermore, some bloggers are seen as “experts” and are having an influence on public opinion. This makes it even more important than ever to accurately and fairly handle interactions with all types of media to ensure correct and supportive message dissemination.

Aligning stakeholder interests
After a deal is closed – or for existing companies in the portfolio – strategic communications can lower barriers to strategy implementation, build revenues, and enhance brand value by keeping stakeholders invested in the process. While media relations will certainly play a role in disseminating complementary messages to various stakeholders, strategy communications does not end there. For example, targeted communications can prepare employees for changes ahead and strengthen relationships with customers, vendors and partners.

A few years ago, The Rouse Company, a regional mall operator, agreed to merge with General Growth Properties (GGP). The $12.6 billion acquisition was finalised in a very short period of time, which gave Rouse and GGP little time to prepare stakeholders, including many of Rouse's own senior executives and other employees.

Knowing stakeholder buy-in was critical to a successful merger, Rouse proactively managed its communications with a wide range of audiences, including investors, employees, property tenants, and other business partners. The firm developed and executed a day-of announcement plan to rapidly disseminate information to over 3,000 employees nationwide and coordinated meetings with key influencer groups such key analysts and national media to further explain the rationale for the transaction. Rouse also counseled management on employee communication best practices and set up an Intranet site, established an employee transaction hotline, and developed collateral material for internal distribution. As a result, the transaction closed at a significant premium for Rouse shareholders and employee turnover was below average during the period prior to closing.

Customers, shareholders, vendors, employees and partners have different sets of concerns, and communications need to be tailored to each group. This is an area where qualitative or quantitative research – such as perception studies, peer best practice analysis, or questionnaires – can guide the direction of communications. Customers might be concerned about changes to products or services. Vendors might be worried about the company's viability as a going concern and may want to pull back on lines of credit. Partners might see this as a chance to break away and start competing ventures. The right research will provide a wealth of insight and hard data to support or refute ideas on various constituencies' pain points and how to properly address them.

Managers can develop corporate initiatives and related communication strategies that speak directly to the challenges and opportunities gleaned from the research. This approach has a direct impact on the firm's reputation among these audiences and can enhance relationships that are critical to a company's profitability in a turnaround.

As each group is different, how you deliver your messages can be just as important as the messages themselves. Are individualised letters the right approach, or would a mass email work just as well? Is a microsite – designed to address complex questions and issues – necessary? What about a blog or a video message from the CEO? The options for delivery are nearly endless. The goal is to find the one that can effectively deliver the message to the largest audience at a comfortable price point.

Creating and sustaining long-term value
Although holding periods differ widely depending on a private equity firm's strategy, the end goal is always to create long-term value that will enable investors make a good return at the time of exit. This includes increasing the value of intangible assets like corporate brands and reputation in order to maximise that spread between net asset value and market value. Furthermore, employee retention as well as customer and partner satisfaction contribute directly to successful operations. Results combined with reputation support and drive corporate valuation.

Even after a company has been sold for its maximum valuation, private equity firms should not assume that the benefits of strategic communications are entirely exited along with the portfolio company. Successfully completing a turnaround and maximising a company's valuation builds a private equity firm's capabilities and reputation. These intangibles are highly valued by potential investors, as well as companies that are looking for capital and business strategy from private equity firms.