Topics:   Corporate Governance,Leadership

Topics:   Corporate Governance,Leadership

August 5, 2010

The M&A Litmus Test: Part 3

August 5, 2010

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


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


Alexandra LajouxAugust 06, 2010

Jack and Hans, thanks for your comments.

You are making two very different points:

On the one hand, Jack, you are asserting the value of outside experts.

On the other hand, Hans, you are pointing out the drawbacks in overly prescriptive advice.

You are both right! You will find your positions vindicated in one of my favorite governance documents of all time, the NACD’s Key Agreed Principles (“NACD’s Key Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies.” They advise boards to use independent advisors when needed, but they also emphasize the need to exercise discretion and judgment rather than conforming blindly to external standards (unless legally required).

I thank both of you for your comments and hope to read you again soon.

Hans NordenAugust 06, 2010

Regarding strategy, when you’ve reached the board level after a lifetime of achievements, who needs anyone telling you how to do your job? What General George Patton said regarding his soldiers is equally applicable to board members and executives: “Never tell people how to do things. Tell them what to do and they will surprise you with their ingenuity.” I’ve written a blog on this and invite all to comment. Visit “What is Your Role in Strategy Anyway?”
Hans Norden
Founder and Strategy Execution Officer for Anticipated Outcome

Jack ProutyAugust 06, 2010

Here is my feedback on the M&A litmus test for the Board of Directors:

One of the key roles of a Board is to serve as advisers to the CEO and bring in a broader business perspective, especially as it comes to assessing the benefits of an M&A or other transaction.

Before sharing my views on the role of the Board in advising on both a Sell side and a Buy side transaction, let me cite a personal experience:

When a large healthcare company was about to acquire a business larger than them, the Company President said, “I will run this integration effort”. The Board said: “no, you already have a full time job running this business plus you have no experience in taking on a major M&A like this; you need to bring in someone with the necessary expertise to run this effort”. As a result my firm was brought in to work in the critical pre-close and post-close period with a dedicated core team from both organizations to combine our skills in effective M&A integration with their expertise of the day-to-day business. Note that on date of announcement t he stock price was 14, within the first 6 months it rose to above 42 and stayed there or above for over 2 years. The President readily acknowledged the wisdom of the Board’s advice.

• On the Sell Side: the Board should be positioned to guide the executives’ thinking on the various options available to them: being acquired, merging with someone else, doing a joint venture, or licensing, agreement. Each has pros and cons regarding control, valuation, and business independence. During the life of a company, it will at some time take on some type of transaction(s) and the Board membership should include someone with the knowledge to provide guidance in this area.
• On the Buy Side: the Board needs to help the CEO understand that while an M&A has the potential for significant business benefits, it also has significant risks and challenges (the Rule of 70/70; 70% fail to deliver shareholder value and 70% is because of inadequate integration planning and execution). This is not business as usual and the CEO needs to approach it as such and make this the #1 business priority, leveraging both the expertise of his/her team with outside subject-matter experts who specialize in M&A integration. The Board can (and should) bring the insights as to what good and bad M&A integration look like because this is not normally a core competency that exists within most companies.