Acquisitions: Identifying & Evaluating the Right Targets

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Acquisitions can be an attractive and effective way to grow the enterprise, diversify the business, and create new revenue streams. These transactions can create increased value and efficiency, spur innovation, and bring top-line growth. But they also come with risks. Experts on this panel discussed the important oversight role that directors play in transformational transactions. Boards should understand how the transaction supports the business strategy, whether the growth potential justifies the price, and whether management has the skills necessary for both the deal and successful integration. Mismanagement of an acquisition can cause significant disruption to operations, failure to achieve the strategic objectives of the business, and damage to a company’s reputation.

1. The point at which a board should be involved in a transaction varies greatly, particularly between public and private companies. Some boards are not involved until deal terms are fully negotiated, while others are involved much earlier (with some directors even being part of the sourcing of potential acquisitions). But when the transaction is transformational, the panelists agreed that directors should be involved early and remain deeply involved at all stages.

2. Critical issues for directors include:

  • Strategy–Boards should be aware of potential “acquisition lust” that drives some CEOs and clearly understand how each deal supports the business strategy. Does the growth in this space make sense? If so, is it more effective to buy than make that growth? Will the deal accelerate growth in an existing business line? Or is the deal for another purpose—e.g., to purchase a significant competitor?
  • Expertise–Boards should carefully examine the competence of management–as augmented by appropriate outside experts—to both negotiate the best transaction and successfully integrate the acquisition into the business. Many deals fail to meet anticipated objectives solely based on poor integration.
  • Financial impact–Boards should play close attention to the economics of the transaction to ensure appropriate diligence regarding valuation issues, as well with regard to the impact of any resulting liabilities.
  • Culture–This aspect of an acquisition often receives less attention, but it can have a significant impact on the long-term success of any transaction. Based on the CEO’s existing approach to external hires, how willing will she or he be to embrace the value of acquired talent?

3. Since most transactions, particularly those involving public companies, will require some litigation, it is important for directors not only to be involved in significant aspects of the transaction, but also to demonstrate their level of involvement. Strong corporate counsel (inside or outside) is important to advise on process and documentation, among other matters.

Anita Antenucci
Senior Managing Director, Houlihan Lokey

Gerald M. Czarnecki
Chairman and CEO, The Deltennium Group; Chairman, NACD Florida Chapter

D’Anne Hurd
Lead Independent Director, Audit Committee, Compensation Committee, Hiperos LLC; Director, Audit Committee Chair, Tripzon Inc.

Atul Jain
Founder and CEO, TEOCO Corp.

This summary provided by PricewaterhouseCoopers.

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