The M&A Litmus Test: Part 5
We have arrived at the last day of your M&A Litmus test—the most important test of this series. We’ll evaluate your…
…Good Business Sense.
Finally, do your directors really understand your business—and business in general, as in, “I am selling a bolt of cloth, let’s make a deal?”—or are they in compliance mode, focusing on this, that, or the other rule?
Doing a good job in M&A oversight really does come down to good business sense. The late, great J. Fred Weston, a mentor of mine, once boiled reasons for M&A down to ten. One of them is to increase the size of a company and therefore increase the power and pay of managers—never a good reason for M&A. But the other nine reasons make good common sense. In closing, I’ll share Fred’s list with you now.
Ask yourselves if the merger will:
- Achieve economies of scale by buying a customer, supplier, or competitor (“operating synergy”)
- Accomplish strategic goals more quickly and more successfully (“strategic planning”)
- Realize a return on investment by buying a company with less efficient managers and making them more efficient (“differential efficiency”)
- Realize a return by buying a company with inefficient managers and replacing them (“inefficient management”)
- Increase market share (“market power”)
- Lower the cost of capital by smoothing cash flow and increasing debt capacity (“financial synergy”)
- Take advantage of a price that is low in comparison to past stock prices and/or estimated future prices, or in relation to the cost the buyer would incur if it built the company from scratch (“undervaluation”)
- Assert control in an underperforming company with dispersed ownership (“agency problems”)
- Obtain a more favorable tax status (“tax efficiency”)
All these come down to this: Will this transaction work for our company?
So, with these five items in mind – M&A IQ, Fiduciary Duties, Strategy, Information Flow, and Good Business Sense – let me ask you: Will you pass the M&A Litmus Test? It’s an important question. Don’t cram at the eleventh hour. Start studying now!
Shout Out to Sources
- NACD Key Agreed Principles to Strengthen Corporate Governance for U.S.Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.
- Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy
- Art of M&A Series, McGraw-Hill
- Report of the NACD Blue Ribbon Commission on Director Liability