When companies ask for your money, first read the fine print

When companies ask for your money, first read the fine print

Hands up if you read the fine print when you receive a company prospectus. Odds on, your hand is still down. Because the sad fact is most of us have a terrible habit of ignoring the fine print. Put it down to lack of time, a trusting nature, or lack of expertise. Either way, it can be a costly mistake – you need to know what you are about to buy.

But when it comes to corporate actions, investors must rigorously read the fine print before parting with hard earned capital.

Whenever a company proposes a major corporate action, it is extremely helpful to first consider the likelihood of losing capital. Unfortunately, corporate presentations will typically lead with the benefits of a deal and leave the key risks in the fine print. I’d like to change the way you perceive this information.

A helpful starting point is realising that the upside benefits of a deal are front focused in the marketing document and are typically well defined. Presentations will detail the earnings of the target on a stand-alone basis and also the value of the synergies that could be gained through integration.

It helps to realise that this is the most that an investor is likely to gain from this corporate action. While management’s assessment may be intentionally conservative, or the integration could result in greater upside than initially anticipated, the bottom line is that synergies are a key selling point for investor approval (if this wasn’t the case, then integration costs would also be included in the headline numbers).

On the downside, however, the acquirer will typically outline the key risks towards the back of the presentation and in smaller print than the assessed benefits. This list is typically extensive and actually articulated well by management. Yet management will not attach any probability or value to the capital that could be lost (despite their best efforts in highlighting the assessed upside value from a deal). Many investors may pass off these stated risks as common sense, such as the risk of the deal falling through or industry conditions changing. But many risks will be listed which you may not have considered.

Ironically, most corporate presentations will feature a disclaimer to seek external advice before investing, but demand an investment decision in the following day or two. Indeed, this disclaimer will typically appear in the key risks alongside the acquirer’s warning that its own due diligence may not have effectively uncovered all the downside from the proposed deal.

Whenever you are asked to participate in a corporate action, take the presentation and read it from back to front. Focus on the key risks first, and do your best to assess the likelihood of losing capital. Only then should you consider the benefits that will comprise most of the presentation. Do not ignore the fine print.