Category: Leadership

The M&A Litmus Test: Part 3

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Today is Day Three of your M&A Litmus Test (three down, two to go!), so we’ll continue by testing your sense of…

Strategy.

Does your board know its role in strategy? NACD has been emphasizing the importance of board involvement in strategy since time immemorial.  Most recently, NACD, with the help of wise counsel (thank you, Ira Millstein and Holly Gregory of Weil Gotshal), boiled down governance guidance from boards, shareholders, and management into ten Key Agreed Principles, including Principle VII: Attention to Information, Agenda & Strategy. We declared that “Governance structures and practices should be designed to support the board in determining its own priorities, resultant agenda, and information needs and to assist the board in focusing on strategy (and associated risks).”

So true! The Report of the NACD Blue Ribbon Commission on the Role of the Board in Corporate Strategy provides specific guidance:

 

  • Boards should be constructively engaged with management to ensure the appropriate development, execution, and modification of the company’s strategy.
  • The nature and extent of the board’s involvement in strategy will depend on the particular circumstances of the company and the industry in which it is operating
  • While the board can—and in some cases should—use a committee of the board or an advisory board to analyze specific aspects of a proposed strategy, the full board should be engaged in the evolution of the strategy
  • Moreover, strategy development should be a cooperative process.
  • Management and the board should jointly establish the process the company will use to develop its strategy, including an understanding of the respective roles of management and the board.
  • Management and the board should agree on specific steps for strategy development.
  • To participate effectively in the strategic thinking process, boards should be prepared to ask incisive questions—anticipating, rather than reacting to, issues of major concern.

So, what does this have to do with M&A? Here’s your answer (with help from the McGraw-Hill M&A Series that yours truly coauthors).

Buy Strategy

By being actively engaged in the formulation of strategy, boards will typically already have some involvement in considering possible acquisitions, since all acquisitions should be consistent with a company’s strategy.

The extent of the board’s involvement in a proposed transaction (for example, questions of disclosure, financing, pricing, structuring, and due diligence) will vary depending on the size of the acquisition and the risks that it may pose. If a very large company regularly buys small companies in its industry and has already developed a process for finding, acquiring, and integrating these small transactions, boards don’t have to focus on the details of any particular transaction. They can and should, however, periodically review the entire merger process, from strategy to integration, in the context of strategy opportunities, attendant risks, and operational implications, to make sure that the process is working.

Sell Strategy

Selling is a big decision, whether or not a company is private or public. Back during World War II, my dad founded a research company, which he sold after twenty years for one million dollars—in paper. The disastrous experience forced him to launch the publication, Mergers & Acquisitions, in 1964—and it’s still going strong. For public companies, the negotiation is even more critical, involving not only an entrepreneur’s wealth, but a host of fiduciary and disclosure considerations.

The board of directors of a public company being acquired via a tender offer must be mindful of its fiduciary responsibilities under state corporate law. Traditionally under state law, as represented by Delaware law and the Model Business Corporation Act, the directors’ fiduciary duty is to shareholders. In the landmark case of Revlon Inc. vs. MacAndrews & Forbes Holdings, Inc. (1986), the court described the role of the board of directors as that of a price-oriented “neutral auctioneer” once a decision has been made to sell the company.

Whether buying or selling, don’t let M&A transactions trigger micromanaging on the part of the board. Directors can help management achieve greater effectiveness. Individual board members may have expertise in various phases along the M&A route, and can help improve the process. Management would be wise to take full advantage of this expertise on an as-needed basis. Major transactions merit formation of an independent committee of the board to analyze the value of the transaction with the help of an independent third party, who can render a fair opinion. But don’t leave valuation up to the experts; boards can take an active role in determining the value of the company they are buying or selling. A great source for that knowledge is the Report of the NACD Blue Ribbon Commission on Performance Metrics, co-chaired by John Dillon and Bill White. Also, there are numerous good books on corporate valuation. (I know because I just coauthored one with Bob Monks and the worthy competition could well kill us!)

Shout Out to Sources

The M&A Litmus Test: Part 1

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How effective is your board? M&A can be your litmus test. If you are making a buy/sell/merge decision, the experience will reveal your board’s capabilities in myriad areas, especially these:

  1. M&A “IQ”
  2. Fiduciary Duties
  3. Strategy
  4. Information Flow, and last, but not least
  5. Good Business Sense

 

 

 

 

Today is Day One of your M&A Litmus Test, so we’ll start by testing your board’s…

 

… M&A IQ.

 

Does your board know why M&A matters?  The wise board won’t leave mergers and acquisitions to external advisors—or wait until the last minute to bring them in. The decision to buy or sell a company of significant size is clearly a matter meriting board attention. On the sell side, time may not be on your side.

Directors serving on public company boards understand that any public company, by definition, is vulnerable to a hostile takeover (since any person with enough funding can buy their shares on the open market through a tender offer and gain control). In 2010, so far there have been nearly 20,000 announced deals worth more than $1 trillion. Some 7 percent of all announced deals worldwide—nearly 1,400 transactions—were unsolicited (hostile) bids.

Directors serving on private company boards need to understand that sometimes M&A is the company’s only exit strategy when the founder wants to retire and there is no next generation of family and/or employees to continue the legacy.

Next, you’ll be tested on fiduciary duties in the sale of a company.  See you in class!

Shout Out to Sources

Culture Shocks and Mergers Made in Heaven

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As employees, executives and board members, we find change both challenging and exciting, which is, after all, only human. In a merger setting, this takes on even greater meaning as the building of new relationships out of old bonds takes time and requires trust. One known catalyst for smoothing the process is calm, confident, visible leadership. In this regard, the new-look NACD is fortunate.

NACD is acquiring Directorship, and people originally involved with each organization are getting to know each other.  Ken Daly, our CEO, and Jeff Cunningham, chairman, CEO and editorial director of Directorship, characterize our merger as bringing together two different organizations that share one common belief: to make good governance a feature of the boardroom landscape.

Directorship MagazineThe benefits of merging our two organizations are clear: We can now offer you a broader and deeper curriculum, a wider range of peer exchange opportunities, and a continued role for the award winning NACD Directorship magazine, a much-valued member benefit.
But any director or executive who has lived through M or A knows that it can take patience and understanding to forge a new entity and make sure rewards are reaped by customers, shareowners and employees.

Of course, I and my colleagues, old and new, will be supported in our new venture by our own board members. NACD Director Karen Hastie Williams is a member of the Continental Airlines board. She will take part in course NACD’s Director Professionalism® course in Laguna Beach, CA, on August 24 and 25, to talk about culture and leadership as the airline prepares to merge with United. NACD Director Rich Koppes, a member of the Valeant board, also will be there. Valeant is proposing to merge with Biovail later this year.

If you have any stories that illustrate ways in which the board and management can maximize the chances of a productive merger, please do share them—add a comment on this blog post.

As Daimler and Chrysler and Turner and Time Warner will tell you, the road ahead can be bumpy—and board members with skills and experience to help the new-look C-suite deliver successful integration will always be in high demand.

Karen Hastie Williams

Karen H. Williams

Rich Koppes

Rich Koppes