While your board doubtless has a number of pressing matters on its work plan and upcoming agendas, it may be informative to build in some time for the discussion of oversight of risks associated with mergers and acquisitions (M&A).
It would be unsurprising if individual directors already have M&A on the brain, as mergers and acquisitions have been making headlines of late. The progression of digital transformation and disruption creates additional needs and opportunities. This week saw the announcement of Open Text Corp.’s plans to acquire Carbonite Inc. Open Text is based in Waterloo, Canada, and operates in 40 countries. It provides on-premise and cloud services in the form of enterprise information management (EIM) software that can yield operational efficiencies through the digitization of supply chains and processes.
Carbonite is a Boston-based cybersecurity and data protection provider, with cloud-based subscription services including backup, disaster recovery and end-point security. Carbonite’s focus on cyber resiliency and its announcement of third quarter financial results (with revenue of $125.6 million representing a 62% year-over-year increase) for the quarter ending September 30, 2019, contributed to its appeal. This acquisition, valued at $1.42 billion and anticipated to close within 90 days of its November 11 announcement, will mark Open Text’s ninth cloud-focused acquisition.
Such acquisitions are not without risk. With M&A transactions representing compelling opportunities for scale and competitive advantage, boards increasingly need to be prepared to provide oversight associated with either acquiring a company or being the target of an acquisition. In the case of the Carbonite board, its Interim Chief Executive Officer and President/Executive Chairman Steve Munford noted the board’s efforts to identify the best means of maximizing shareholder value on the heels of “expressions of interest from multiple parties.”
Risk Management for M&A
The degree to which your directors, individually and collectively, are experienced in merger and acquisition (M&A) oversight may impact their decisions as to the extent of time and resources the board will want to dedicate to discussion of oversight responsibilities in mitigating risks while capitalizing on opportunities. For, although it’s management’s responsibility to develop and execute a company’s M&A strategy, the board is responsible for independent oversight of prospective M&A transactions. That’s appropriate, since any such transactions will impact shareholder value.
Consider, as a case in point, reports in late October 2019 of the $4.5 billion hit Altria Inc. incurred following its 2018 investment in Juul Labs Inc. Last year, the Marlboro maker invested $12.8 billion for a 35% stake in the San Francisco-headquartered startup and e-cigarette maker. In recent months, you’d be hard-pressed not to have noticed reports of e-cigarettes’ popularity among teenagers, and regulatory bans and health concerns associated with teens and vaping.
There have been additional impacts, as talks of a merger between Altria and Philip Morris International Inc. came to an end in September 2019. The Globe and Mail has reported that, had these two tobacco companies reunited in a merger, it would have created “a company with a market value of more than $200 billion (162.9 billion pounds), representing the fourth-largest deal of all time, according to Refinitiv data.”
Opportunities Through M&A Acquisition
Boards must be cognizant of a range of potential risks associated with M&A opportunities, several of which are geopolitical in nature. This time last year, EY reported that only 46% of Canadian executives planned to pursue M&A opportunities in the year ahead. In fact, and on the heels of record-breaking levels of such activity, EY’s 2018 survey found that changes to trade and tariff policies were causing 19% of executives to reconsider potential acquisitions. In its 2019 Global Capital Confidence Barometer M&A Survey report, EY reiterated these challenges, along with changing economic policies.
Despite the challenges, opportunities and growth needs are such that EY sees the upward M&A trend continuing. Despite economic and regulatory policy changes, EY noted that more than half of its respondents will be allocating between one-quarter and one-half of their investment capital to their “digital futures.”
Whether or not your board perceives the prospect of a merger or acquisition in the near future, directors need to be prepared for the possibility. Oversight of a prospective M&A transaction represents a particularly significant test of a board’s capabilities. In overseeing such transactions, the board must function in such a manner as to withstand scrutiny on the part of shareholders, regulatory bodies and additional parties.
As cited in the case of Open Text’s acquisition of Carbonite, the board must scrutinize opportunities with shareholders’ best interests front and center. Failure to do so, or if an M&A process or outcome is deemed flawed, may result in individual directors and the board being held accountable – legally, reputationally, or both.
M&A Due Diligence
Due diligence may not begin with the assessment of provincial/state, domestic and foreign legislation, licensing and regulations, but, as has been seen in the case of Juul, these represent critical considerations. Assessing risk may begin with a look at the other company, from the board and executive team to incorporation date and location, corporate divisions, subsidiaries and any joint-ventures and past reorganizations. Historical and projected financials, along with liabilities, banking and investment relationships, accounting and taxes will also form part of the due diligence process.
The board will want to understand the other company’s market and products, as well as clients, employee relations, suppliers and competition. This is an incomplete list, as your due diligence checklist will also encompass cultural, environmental, inventory, legal, operational, public relations, real estate and other considerations.
There’s a great deal at stake in the M&A arena, and shareholders aren’t the only stakeholders. M&A outcomes also have the potential to impact employees, clients, creditors and suppliers, and the board needs to consider these interests as it weighs the risks associated with any such transaction.