A board of directors operates from a different perspective than the CEO and her/his management team. Though the CEO is typically responsible for generating the company’s strategic plan, day-to-day obligations often don’t permit the detached long-term assessment that the board can provide in working to develop and then oversee the implementation and execution of the strategy. As a key component of this oversight role, a board often must evaluate merger and acquisition (M&A) activity to ensure that an individual transaction is a wise step in the context of the strategic plan. The board’s appropriate role in this regard starts long before a specific M&A proposal is being considered.
Importance of the Company M&A Infrastructure
With its high-level view of a company’s financial, operational and managerial resources, a board should play a key role in determining whether a specific proposed merger or acquisition makes the best use of those resources and will help achieve the goals of the strategic plan. At the outset, however, a board must challenge the CEO to build a foundational infrastructure that will support successful M&A activity.
The “M&A team” must not only be skilled at screening M&A targets, conducting due diligence and integrating acquired businesses, but also be capable of influencing the rest of the company. Toward these ends, the board:
- Needs to take appropriate steps to ensure that the M&A team is composed of individuals with the skills and experience required to conduct proper due diligence and analyze M&A
- Should ensure that the M&A team is sufficiently supported and can bring the necessary credibility to bear on the rest of the organization to successfully leverage the M&A target’s strengths within the company structure.
- Should continually review prior M&A results and determine if process changes are called for to improve the execution of M&A transactions and to efficiently integrate the acquired businesses into the company’s operation.
- Needs to candidly assess the company’s prior willingness and ability to jettison acquisitions that have failed and no longer align with the strategic plan.
Directors should also ensure that management understands and appreciates the primary reasons why M&A plans frequently fail to achieve expected results. This duty requires the board to continually remind and, when necessary, educate management about the reasons for failure, including:
- Paying too much for the target company.
- A less-than-thorough due diligence process, leading to a significant misunderstanding of the target, its liabilities, earnings forecasts and the nature of its intellectual property.
- Failure to understand and plan for clashes of culture between the company and the M&A target.
- Ineffective or inefficient integration of the acquired business.
These are all strategic board-level foundational issues that the CEO and his team need to address before the company undertakes an M&A strategy. These issues run to the core of the management team’s responsibilities and it is therefore often only the board, with its detached perspective and broad range of experience, that possesses the credibility to challenge naïve and overly optimistic assumptions.
Analyzing M&A Proposals
It is no surprise that successful acquisitions start with a well-developed, well-written specific set of ideas for how the M&A target will create value for the company. Vague goals – “pursuing international scale, filling portfolio gaps or building a third leg of the portfolio” – are often a precursor to failed deals.
Timely and focused input from the board can play a crucial role in enhancing the chances that an M&A opportunity will be approved or rejected appropriately. From the start, it is important to recognize that an M&A team can naturally develop a “deal favoring bias” as more and more energy is expended on assessing an opportunity. The board can minimize this bias by asking key critical questions of the CEO and the team:
- What is the fundamental goal of the merger or acquisition? Capital deployment? Scale? Technology? Key people?
- How does the acquisition strategy specifically fit into the overall strategic plan? The board should demand a succinct description of the strategic synergies.
- Can the due diligence analysis be explained clearly and simply? If not, it will likely be necessary to take a deeper look.
- Beyond due diligence operational and financial factors, is there significant congruence of the two companies’ key operational components, such as cybersecurity platforms, enterprise risk management (ERM) programs, and regulatory concerns and approaches?
- How are the key parties involved in the anticipated transaction to be compensated? Will the management team, bankers or consultants receive bonuses based upon the success of the M&A strategy? If there is a great deal of vested interest in the success of the M&A transaction, the board may not be receiving the most objective information.
When evaluating a proposed acquisition or merger, it may be helpful to set up two analysis teams, one in favor of the deal and one opposing it. To overcome bias, force analysts to initiate M&A evaluations with a “this won’t fit” mindset, so that the team must be convinced to approve the deal. This will help to ensure that the assumed benefits of an M&A opportunity won’t supersede objective analysis of negative factors and cloud decision-making.
Above all else, the board must always remember its primary role – preserving and enhancing shareholder value. It does so by maintaining focus upon its core duties – strategy, oversight and governance. The board’s role in assessing M&A activity is consistent with these duties.
The board should continually ensure that the company has taken the necessary steps to build a solid M&A foundation with a skilled assessment team that receives the necessary support to be successful. When an M&A opportunity is proposed, the board should review the transaction with an eye to ensuring that it is consistent with the company strategy. To accomplish this, the board should be ready to challenge the particular assumptions that underlie the deal.
This is not an isolated task. The board should remain actively involved throughout the M&A process, overseeing management decisions. At the conclusion of the process, the board should assess the proposed agreement and determine whether to recommend it to company shareholders.
By properly exercising their responsibilities, and providing the advice and perspective that can come only from directors, the board can help increase shareholder value, build acceptance within the organization and mitigate risk.