Tag Archive: mergers and acquisitions

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.

Beating the M&A Odds: Three Big Risks and Key Questions for Directors

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Director Essentials: Strengthening Oversight of M&A

Director Essentials: Strengthening M&A Oversight is available exclusively to NACD members. To become a member, please contact Brandan Nass at Join@NACDonline.org. To learn more about NACD, visit NACDonline.org

Every corporate director knows the importance of M&A in the grand scheme of enterprise. With some 40,000 significant transactions announced annually, M&A is hard to ignore. Yet there are persistent risks that directors need to understand and mitigate through insightful questions and the dialogue that ensues.

  1. Risk: Not all bets will pay off—at least not right away. Buying a company means placing a bet on the future. Given the level of unpredictability involved, there is some chance that the merger will fail to achieve its goals and/or fail to return incremental value to shareholders. It is commonly cited that “80 percent of all mergers fail” to add value; however, this percentage is an exaggeration. Event studies that compare transactions over time present a more realistic picture by showing that incremental financial value is not assured. For example, a study conducted by Kingston Duffie, publisher of the digital magazine Braid, indicates that companies actually lost 4.8 percent of their value when they spent at least five percent of their market capitalization on M&A during the 18-month period between October 2014 and March 2016. The interactive graphic included in the study shows differentiated performance during the period—high for Stamps.com Inc., medium for Starwood Hotels & Resorts Worldwide Inc., and low for EV Energy Partners. Your company could experience returns like any one of these.

Question for Directors: If this merger ends up having a slightly negative result for our shareholders, what are the compelling strategic reasons to do this deal? When do we believe that deal synergies will materialize?

  1. Risk: As a director, you could be named in a lawsuit—especially if you are voting on the sale of a company. In 2015, lawsuits were brought in 87.7 percent of completed takeovers. Although most cases settle, some do go to trial. In a trial setting there are four main standards for judging director conduct in the sale of the company, ranging from lenient to stringent:
  • The business judgment rule (trusting the decision as long as directors have no conflicts of interest and are reasonably well informed).
  • The Unocal standard (protecting anti-takeover moves only if a threat is real).
  • The Revlon standard (requiring an auction process once a company is in play).
  • Entire fairness (requiring both a fair price and a fair process).

In addition, when a company has promised its shareholders the right to have the company appraised, the court itself can impose its own valuation. In the original Dell go-private transaction, the court retroactively forced the company to pay aggrieved stockholders what the court deemed to be a missing increment to their premium.

Question for Directors: How can we find assurance that sale is in the best interest of the company and its owners, and that we have chosen an optimal price? How can we ensure that there is a litigation-ready record of our deliberations in this regard?

  1. Risk: You could lose your board seat. According to a study by Kevin W. McLaughlin and Chinmoy Ghosh of the University of Con­necticut, there is a higher rate of retention for directors from the acquiring firm (83 percent) following a merger, with the most likely survivors being individuals who serve on more than one outside board. Only about one-third of directors from the target board (34 percent of the inside directors and 29 percent of the outside directors) continue to serve after the merger.

This October, when Dell Inc. and EMC Corp. officially merge (assuming full regulatory clearance following their recent shareholder approval), many who serve on the EMC board may not be on the post-merger Dell board, including retiring EMC Chair-CEO Joe Tucci. When the merger was first announced last October, a spokesman for Elliott Management Corp. stated in a press release, “Elliott strongly supports this deal. As large stockholders, we have enjoyed a productive and collaborative dialogue with Joe Tucci and EMC’s Board and management. We are confident that this Board has worked tirelessly to evaluate all paths for the company and that today’s transaction represents the best outcome for stockholders.”

Saying goodbye to some or all of these incumbents this fall will seem to be an ironic outcome for creating value. And yet that is how it must be. Fiduciaries are not self-serving, but rather they serve on behalf of shareholders to promote the best interests of the company. As such, they need to be ready to move on when that is the best outcome for the corporation. Still, it is disruptive (and not always creatively so) to be a trusted voice of wisdom for the future one day, and mere history the next.  

Question for Directors: If we sell this company and our board must merge or disband, who among us will be most useful in steering the combined company in the next chapter?

These are not easy questions. But by asking them, directors can help their companies beat the tough M&A odds.

For more insights, see Director Essentials: Strengthening M&A Oversight, and Governance Challenges 2016: M&A Oversight—two new publications available without charge to all NACD members. See also “Does the Deal Fit the Strategy?” in Metropolitan Corporate Counsel, and “Project M&A” in Financier Worldwide.