An old comic strip in my office shows the character Ziggy in a car facing two billboards: “Highway of Life” and “ Expect Delays.” This sentiment seems to apply to Sanofi-Aventis’s prolonged merger negotiations with Genzyme.
According to published reports, the apparent source of the delay has been agreement upon price, given the manufacturing problems at Genzyme. However, a bigger question the board must assess is whether senior management can address these issues within a timeframe that provides the expected return on investment.
This situation is not unique. As opportunities for “bargain” deals resulting from performance problems become more plentiful in our rapidly changing business environment, it’s critical for boards to go beyond questioning the logic and price of the deal and also assess the potential impact of cultural issues that can make or break success.
Here are questions to ask senior management:
What are the business culture strengths and obstacles that will impact integration (e.g., speed of decision making, communication flow, etc.)?
What plans exist to deal with the natural organizational anxiety and resistance that comes with mergers?
What is the plan for communicating with stakeholder groups to gain their support before and during integration?
Asking these and other questions regarding culture, combined with questions regarding strategic fit, will enable your board to not only accelerate ROI in the short term but in the long term as well.
Pamela S. Harper
Pamela S. Harper
Pamela S. Harper is founding partner and CEO of Business Advancement Inc (BAI). and author of the book Preventing Strategic Gridlock (Cameo Publications). She is on the boards of two nonprofit organizations. Since 1991, BAI has collaborated with senior executives and boards to develop strategy, increase leadership effectiveness, and improve organizational engagement and capability for maximum innovation, growth and profitability.
When it comes to M&A information, flow is critical. The type, quantity, format, timing, and source of the information that fuels board knowledge will vary from board to board and will also change over time for a particular board. It will also vary among board members, who have different levels of experience and expertise with different topics.
Information flow is critical for directors with respect to capital allocation decisions—in particular, mergers and acquisitions. This area requires special attention to the long-term interests of the corporation and the ways in which management’s interests may affect transactions. As the report noted, the board and management need to regularly discuss the opportunities for and threats to the company, even in the absence of any planned or foreseen transactions, so that directors have an understanding of the business context in which these issues may arise.
Depending on the size and business context of the company, notes the report, directors should periodically receive information related to, and discuss with management, the following:
Comparative studies and analysis concerning whether the company would be more viable by merging with, or entering into alliances with, another candidate, or standing alone;
Possible acquisition candidates. When discussing the fulfillment of certain of the company’s business strategies, such as entering into new lines of business, directors should receive information on possible alternatives, such as an acquisition or strategic alliance, to achieve the same objectives; and
The merger activity of competitors, including the impact of recent activities on the company’s market share. Competitive analysis as to other suitors for the same potential acquisition candidates might also be warranted.
Maintaining an up-to-date understanding of these issues will help directors to remain prepared for the time when management actually proposes a transaction. This is particularly critical for directors of public companies, who should understand the company’s plans and legal options for responding to unsolicited takeover offers.
In evaluating a particular transaction, notes the Report, directors should seek specific information about the price, timing, and certainty of the transaction, and should be proactive in overseeing negotiations. Directors should understand how the transaction will be financed, and the projected financial impact on the company under reasonably likely scenarios. Where the sale of the transaction warrants it, directors should seek independent financial advice from outside experts to consider together with management’s financial assessment.
Directors should also obtain a high-level analysis of the merger documentation, including an understanding of the most important representations, covenants, and indemnities contained therein and their application to the company and the transaction. In addition, directors should receive input from market and investor relations experts about the best manner in which to position the transaction and the likely reception from investors and creditors. As with any other matter before them, directors should crucially evaluate all the information they have obtained and arrive at an independent assessment instead of relying exclusively on management’s views.
Directors should also be alert to differences between management and shareholder interests in negotiating a particular transaction. For example, shareholders will be far less interested than managers in knowing who will continue to work for the merged company and with what responsibilities. These employment issues are important but they should not override concerns about long-term returns to shareholders.
Shout Out to Sources
NACDKey Agreed Principles to Strengthen Corporate Governance for U.S.Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.
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:
Information Flow, and last, but not least
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
NACDKey Agreed Principles to Strengthen Corporate Governance for U.S. Publicly Traded Companies. Download a complimentary copy at www.NACDonline.org/LeadingtheWay.