Tag Archive: mergers and acquisitions

Governance at 30,000 Feet

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American Airlines Group director Alberto Ibargüen recently led a fireside chat with the company’s CEO and Chair Doug Parker during the NACD Florida Chapter’s season kick-off event at Miami International Airport. With more than 100 in attendance, the program featured insights into the highly competitive airline industry along with some key considerations for directors.

A New Day for the Airline Industry

From left to right: Sherrill Hudson, NACD Florida Chapter Chairman; Lauren Smith, NACD Florida Chapter President: Doug Parker, American Airlines Group Inc. and American Airlines CEO and Chairman, and American Airlines director Alberto Ibargüen

From 1978 until deregulation of the airlines, the airline industry yielded no return on capital; however, since the merger of American Airlines and US Airways less than four years ago, American has generated $20 billion in profits. Three airlines—American, Delta, and United—are now leading the pack in rationalizing and leveraging the hub model to offer passenger service across the globe while generating positive returns. Parker insists this is the industry’s “new normal” and spends a great deal of time convincing constituents that the industry is not simply experiencing a temporary “up” in a long-term cycle.

Parker explained that the company must now invest in its people and its products, taking a long-term view of the business. For example, American invested in new aircraft and now has the youngest fleet of any U.S. airline. With regard to employees, many of whom are unionized, Parker raised wages in the middle of a contract term in order to fulfill his promises to them during the merger. He explained, “I use the ‘look them in the eye’ test when it comes to the 120,000 people on the American payroll,” emphasizing the importance of transparent communication with employees. Another area of investment is data protection, and the board routinely raises the issue of cyber risk.

Merger Advice

“Never undertake a merger when there’s not a clear strategy,” cautioned Parker, when talking about the successful US Airways and American merger. Recognizing the herculean amount of work required to meld systems and go-to-market philosophies, he added, “You shouldn’t put your team through one unless two plus two will equal five, not 4.2.”

In terms of building a post-merger board, the merged company board consisted of two American board members, three US Airways board members, including Parker, and five members from the creditors’ committee. With this blended group, directors did not focus on the “this is how we did things” historical perspective, but rather the group was able to move forward as a relatively cohesive unit from the beginning.

Communication and tone at the top became priorities for the board and management after the merger as well. Parker began holding town hall-style meetings, taking questions from employees. These sessions are recorded and offered to American’s employees worldwide.

A Strategic-Asset Board Focused on the Customer Experience

Parker emphasized that by asking the right questions, the board has had an enormous impact on management, “ensuring that the team has a strategic focus.” Given the day-to-day demands of running an airline, pulling the team from those responsibilities can be challenging. Still, the board insisted on an offsite focused on strategic planning, which proved to be very valuable. “I put off the retreat for two years because we were so busy with the integration,” said Parker. “But the offsite was valuable because we were forced to articulate our strategy in a way that could be understood by others, like the teams and investors.”

American Airlines director Susan Kronick, who was in the audience, added that the board works well because it is diverse. “Our board is diverse in terms of gender, ethnicity, and, most importantly, points of view,” she said. “We have rich discussions, and everyone is moving forward together.” She added that a keen focus on the customer experience is a unifying factor. “We take the proactive perspective that the culture of the company is a competitive advantage for us with customers.”

Parker added that the board members aren’t afraid to speak up, and his job is to ensure his team is communicating well to the board. He also echoed the board’s focus on the customer.

“We are transporting people at 525 miles per hour, so we are constrained by the laws of physics,” said Parker. “But we can make sure the rest of the experience is as efficient and comfortable as possible.”

The NACD Florida Chapter would like to thank American Airlines and Miami International Airport for supporting this event and the behind-the-scenes airport tour that preceded the program.

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.

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.