Tag Archive: mergers and acquisitions

Ten Keys to Effective Board Oversight of M&A

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Jim DeLoach

In 2016, the National Association of Corporate Directors (NACD) and Protiviti co-hosted a series of roundtables that brought together more than 60 directors to discuss current challenges and effective practices in board-level mergers and acquisitions (M&A) oversight. Based on insights from the roundtables and our experience serving clients in the M&A space, we offer the following keys to the board’s M&A oversight.

1. View M&A through the lens of the growth strategy. Companies pursuing growth through M&A should articulate the strategic underpinnings of the growth strategy. Doing so provides a context for evaluating prospective targets and their strategic fit (e.g., additive to the core business, diversification into a new line of business, entrance into new markets, and/or transformation of the organization). Understanding the strategic context provides a strong foundation for directors and executive management to agree, long before a deal is placed on the table, on the appetite for risk and metrics for measuring deal success.

2. Oversee M&A as an end-to-end cycle, rather than a transaction. The board should focus on the M&A life cycle which begins with identifying the right markets and targets consistent with the growth strategy and acquisition criteria, and continues with:

  • Defining and executing a thorough, efficient due diligence process;
  • Preparing a robust, phased integration plan to capture targeted deal values;
  • Pricing and financing the deal;
  • Following up a consummated deal with a well-resourced and effectively communicated execution of the integration plan according to the established timetable;
  • Conducting a post-mortem to identify opportunities to improve the process.

Directors should be engaged throughout the process (see next point).

3. Determine the extent of board involvement in each phase of the process. For complex and risky transactions, the board should expect periodic updates at various stages of the due diligence process, as well as on the progress of the integration strategy after approval and consummation of the deal. The board needs to decide where the point of oversight should reside—with the full board or one or more standing committees. To the extent necessary, the board should avail itself of the advice of subject-matter experts on due diligence, tax, valuation, corruption, antitrust, cybersecurity, and other issues.

4. Make sure the critical competencies are in place to execute the full M&A process. It takes talent and expertise to manage the M&A life cycle. Viewing M&A as an end-to-end process provides a powerful context for evaluating the management team’s capabilities to execute each phase of that process.

5. Challenge deal assumptions and expected synergies. When M&A targets are proposed, either the full board or a designated standing or special committee should assess deal assumptions and synergies. Are management’s revenue and cost assumptions reasonable? Are the expected synergies that were reflected in the deal pro formas realistic? Is the integration plan to execute on the assumptions likely to deliver the synergies after consummation of the deal? For complex deals, the board may want management to stress-test deal assumptions against well-defined scenarios and alternative futures before deal approval.

6. Manage senior management’s emotional investment. A clear business case should outline why the transaction is essential to the growth strategy. Deal presentations that hype optimistic projections and accentuate only positive possible outcomes are a red flag. The board should insist that management also provide a balanced contrarian view that articulates the deal risks and what can go wrong—perhaps through a “red team” that challenges deal assumptions to discover fatal flaws and temper complacency that often follows past successes. Executive sessions are another means of ensuring the board has access to candid and dissenting views on such matters as target suitability, deal pricing, and go/no-go decisions.

7. Constructively engage management in due diligence. To accomplish the due diligence objectives, the inclusion of objective third parties on the due diligence team may be warranted, particularly for financial, tax, compliance, human resources, cybersecurity, and industry-specific issues. Despite management’s and the board’s best efforts, due diligence often has inherent limitations when it is not possible to gain access to the required information. Despite these limitations, an acquirer should be cautious about making a deal without sufficient due diligence, even when time may be of the essence. No one should be in a rush to make a serious error.

8. Understand the integration plan and its viability before approving the deal. The board should carefully review management’s integration plan. The review should seek clarity of the plan’s intended purpose, how it is to be achieved, who is leading the effort, and the change management and other obstacles that could frustrate the plan’s execution. The board should satisfy itself that the integration plan is compelling and robust. The plan should engender confidence that management understands how the integration effort and team will deliver the expected deal value, whether through changing the current operating structure, blending talent from the two companies, addressing the technology infrastructure, or overcoming cultural challenges. The board should sign off on the duration of time in which the expected value will be delivered and consider holding leaders accountable even when they have moved into other areas of the company.

9. Stay on top of the integration process. When the deal is consummated, the hard work toward delivering the expected deal value has just begun. Effective integration requires continued vigilance, including periodic tracking of progress, attention to managing cultural differences, making decisions quickly, retaining key personnel, staying on schedule, and maintaining accountability for results. During the NACD roundtables, several directors reported that their boards used information from the pro formas generated during the due diligence phase to hold management accountable through periodic (say, quarterly) reports after a deal closes. The idea is twofold: (a) gauge management’s success comparing pro formas with actual results; and (b) drive more realistic pro formas during the deal evaluation phase. When sponsoring executives know that pro formas will be the board’s baseline for evaluating deal performance, they are incentivized to set realistic integration goals.

10. Continuously improve the process through look-backs. Once significant deals have run their course, the board should consider conducting a post-mortem review of completed transactions to determine what worked well, the lessons learned, and specific improvements to address in the future. Reviews conducted with a focus on learning should not resort to finger-pointing.

In summary, effective board oversight of M&A can create competitive advantage and enterprise value through consummation of successful deals. Likewise, it can help avert the loss of enterprise value through preventable deal failures.


Jim DeLoach is managing director of Protiviti. 

The Board’s Role in Betting the Market Cap

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Take a moment to place yourself in this board’s shoes. The company has…

Kimberly Simpson

Kimberly Simpson

  • An enviable revenue stream, with approximately $120 million in sales per day and an average sales order of $2,000;
  • A strong balance sheet with very little debt;
  • A need to react to seismic shifts in customer needs;
  • An overweight of assets in Europe while sizable growth for your industry has been predicted in Asia; and
  • A market cap of roughly $2.6 billion.

What would your board do?

Would your board be comfortable acquiring a division of a competitor for $2.4 billion in cash and 2.785 million shares of your company’s common stock, representing an approximate seven percent ownership position?

In a “bet the market cap” move, Tech Data Corp. took these actions, acquiring Avnet’s Technology Solutions business in 2017. Technology Solutions partners with more than 40 of the world’s top information technology (IT) vendors to address the IT business needs of 20,000 customers in more than 80 countries, including the Asia Pacific region (a new market for Tech Data). This acquisition makes Tech Data the largest public company headquartered in Florida by revenue, and is expected to catapult the company to a position among the forthcoming 2017 Fortune 100.

David Walker, director of NACD’s Florida Chapter as well as Chico’s FAS, CoreLogic and CommVault Systems, moderated a conversation featuring Robert M. Dutkowsky, Tech Data CEO and incoming chair; Steven A. Raymund, retiring Tech Data chair; and Charles “Eddie” Adair, chair of the board’s Transaction Committee. The panelists discussed the acquisition at a recent NACD Florida Chapter event held at Tech Data headquarters in Clearwater, Florida.

The Importance of Strategic Planning

At the urging of the Tech Data board, Dutkowsky and the management team undertook a significant strategic planning process two years prior to the acquisition. Called “TDNext,” the project was an iterative one, with the board pushing back several times before a final plan was achieved. The board’s strategic planning process revealed a customer demand to accelerate growth in the “third platform.”

The third platform refers to the ability to leverage the cloud, mobility, big data, and other next-generation technologies for business, as businesses move beyond the first two platforms, mainframes, and client servers. The company recognized that Technology Solutions, which delivers technology services, software, hardware, and solutions across the data center, would be complementary to Tech Data’s diversified portfolio of offerings in moving customers to the third platform. Also, the plan’s revelation that Tech Data was overweighted in Europe was validated the day that Brexit was announced and the company’s stock dropped significantly.

M&A Experience and Unexpected Bumps

A perfect alignment occurred at Tech Data to move the acquisition forward. The management team was ready, and the balance sheet supported the deal. The highly experienced board had guided multiple acquisitions at the company and elsewhere; the culture of the board was one of trust with each other and with management; and a transaction committee comprised of three committee chairs, led by Adair, acted as a consultancy and cheerleader for management during the negotiations.

One unexpected bump did occur during the acquisition process. Rick Hamada, chief executive officer of Avnet, abruptly departed as the agreement was nearing completion. With Hamada as the primary point of contact for the deal until that time, Dutkowsky had to find common ground with a new CEO during final negotiations.

Integration, Integration, Integration

Despite the alignment of board and CEO at Tech Data, the road to a successful deal still lies ahead as Tech Data integrates Technology Solutions. According to Raymund, the board now wants to hear about execution, not strategy, for the next several months.

For his part, Dutkowsky praises the relationship he has with his board, saying he can always discuss challenges and hurdles without worrying about finger pointing. That said, when it comes to the work ahead, he adds, “Either I will hit the board’s objectives, or somebody else will…. And I’m fine with that.”

NACD Florida would like to thank the team at Tech Data for hosting the program and the panelists for sharing their experiences with attendees.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.

Lessons Learned from a Godfather Offer

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Kimberly Simpson

Kimberly Simpson

Is your board ready if the company receives a so-called godfather offer—an offer so strong it cannot be ignored—to purchase the company? Could social conflicts within the company be the undoing of an M&A deal that would benefit shareholders? Panelists at a recent NACD Carolinas Chapter program shared insights on board readiness, lessons learned, and the current state of the M&A market.

The Godfather Offer at Piedmont Natural Gas

According to Tom Skains, former chair and CEO of Piedmont Natural Gas Company, and director of Duke Energy Corp., directors should remember two critical points about the possibility for M&A activity at their companies:

  1. Always be prepared for the unexpected.
  2. Everything is for sale at the right price.

In the case of Piedmont, Skains was aware of industry consolidation and how Piedmont performance compared to peers. However, given the company’s stock price in 2015, he believed Piedmont would be among the last in the industry to be an acquisition target. Nonetheless, after two major companies in the field merged in what became the catalyst for Piedmont, the company was courted by two potential suitors, with offers as much as 50 percent over the company’s trading value. Within two months, Duke Energy purchased Piedmont for $4.9 billion.

How was the deal wrapped so quickly? Skains shared the formula for success.

  • Appoint a deal lead and keep flawless records. Skains was the chief negotiator, and only a small group knew about the potential deal. Skains kept a log of his conversations and reviewed the log at the end of each day with his general counsel.
  • Be transparent with the board. The board was fully informed. In fact, Skains updated the lead independent director each day. Regular executive sessions of the board were held.
  • Deploy good deal hygiene. The official record was the board minutes, and no note taking was permitted. No errant emails or texts were allowed.

The deal also was able to move with greater speed because conflicts were removed from the equation. In fact, to avoid awkward social challenges between the acquiring company and the target, the potential roles of Piedmont leadership were removed as considerations until the deal was done.

Navigating Social Issues in a Merger of Equals

Walter Wilkinson, founder and general partner of Kitty Hawk Capital, and lead independent director for QORVO, emphasized that many deals never get done because of social issues—that is, the future of a merging company’s management team or its directors. He shared his experience as a board chair during a nine-month merger process involving two semiconductor companies.

Social issues arose involving both CEOs, and then to which CFO would take become the CFO for the consolidated company’s new CEO. Also, four board members from each company board ultimately had seats on the consolidated board, but information had to be limited so those who were exiting would not have personal concerns during the negotiations. Eventually the merger was successful, but it is worth noting that social dynamics took time to resolve.

For more guidance on M&A, Wilkinson recommended NACD’s recent article, “Navigating M&A Deals in an Uncertain Environment: Five Questions for Directors.”

M&A: Going Strong

Tim Wielechowski, managing director in the Mergers & Acquisitions Group at Wells Fargo Securities, shared a bright picture of the M&A market:

  • Despite the fact that M&A activity was slightly down in 2016 from a record year in 2015, the M&A market continues to be healthy and robust. In 2017, volume year to date has surpassed last year’s volume for the same time period. Valuations remain high.
  • Private equity participation has been increasing, competing with strategic buyers.
  • It is common for deals to be over-equitized in order to get them done, and 40 percent equity contribution is typical.
  • CEO optimism is strong due to the anticipated pro-business environment.

Chris Gyves, a partner at Womble, Carlyle, Sandridge and Rice, LLP, expertly moderated the panel. NACD Carolinas would like to thank him and the panelists for sharing their experiences with attendees.

Kimberly Simpson is an NACD regional director, providing strategic support to NACD chapters in the Capital Area, Atlanta, Florida, the Carolinas, North Texas and the Research Triangle. Simpson, a former general counsel, was a U.S. Marshall Memorial Fellow to Europe in 2005.