We have all experienced this as C-suite executives and members of boards looking on as peer companies merge, or acquire — and the combined firm does not deliver on the promises. Questions top-of-mind for us: What went wrong? What can be fixed? Why was the promise unfulfilled?
In the answers may be insight to be gained for the director about the considerable risks and opportunities related to M&A activities — and why the initial promises may not be kept.
And most important for participants in the combination in terms of communicating with shareholders and key stakeholders: How does the board and management explain the ultimate success or failure of a merger and/or acquisition?
Many factors are critical: as directors, you must assess the risks and opportunities and, of course, you need to buy the right company for the right price at the right time. Even with all of the correct elements in place upfront, the acquisition can still turn out to be a disaster for the acquirer — and the acquired enterprise.
Prevention Tips
Here are certain observations and recommendations to help understand how to prevent a disastrous acquisition — and for assessing what went wrong, to fix the acquisition in time, and to prevent the company from going down the same path again:
Determine if the executives from the combining companies perhaps did not have a shared view of the final integration. Straight talk during negotiations is very critical. Did this happen? Ultimately, management needs to strongly clarify the expectations of the combined organization.
Unproductive integration teams can cause real damage: Integration teams can make or break a combination and often suffer from having unclear objectives and poor leadership. Consequently, senior management needs to refocus the charters of the various integration teams and select capable team leaders that are also sensitive to the human side of the integration and can be more diplomatic and compassionate.
Cultures determine outcomes: Human and cultural issues are too often ignored at all levels. Of course, whatever the initial promise may be, in fact mergers can create stress, distraction from day-to-day performance and the clash of corporate cultures. Management should clearly acknowledge — rather than deny or ignore — the human and cultural aspects of the combination, engage employees to understand why the deal occurred and how they could contribute to its success. These are important steps toward building a “one company, one team” mindset. Of course, the collective wisdom of the boardroom is an important resource for the C-suite in these endeavors.
The Board's Role
Here is a discussion of the board's role in reviewing an M&A transaction:
What really is the strategic fit? Why is the deal being done? Is the transaction consistent with the acquiring firm's long-term strategy?
Has the board assessed the reasonableness of the revenue and cost assumptions and benefits from expected synergies?
Does the board really understand the risks inherent in the deal?
Board Discussion and Due Diligence
To be discussed in the board setting — and due diligence applied by the board:
Review the integration plan to understand how the integration will be achieved, who is heading the integration and the obstacles that could frustrate execution of the plan.
Understand the plan to help manage cultural differences in the integration plan and the plan for the retention of key executives.
Boards may decide to engage subject matter experts (“SMEs”) to provide due diligence in specific areas of risk that may include the integration of the technology platforms, to stress testing management's assumptions, evaluate deal pricing, in addition to reviewing legal, compliance, tax, accounting and regulatory areas of exposure.
Boards should expect periodic updates from management during due diligence and timely and realistic updates on the progress of the integration plan.
Boards should consider reviewing past transactions — a postmortem review to determine which lessons learned may be applied to this transaction.
Strategy Is Key in Acquisitions
Consistent with their responsibility for strategy, governance, and oversight, the board seeks to understand the strategic substance of the transaction to better evaluate the benefits to the company and ask probing questions to assess the reasons for the acquisition.
A board can play various roles that go beyond the legal, regulatory, and fiduciary obligations. The diverse experiences of board members with long leadership careers in different companies can shed useful light on similar organizational risks.
However, many boards are reluctant to cross the line between governance and management and miss opportunities to help senior executives be successful at M&A.
I would suggest here that to help make M&A decision making more effective, the board or a designated subcommittee should be more actively involved with the pipeline of potential transactions.
Of critical importance: Both the board and management, working together on M&A transactions, can create a competitive advantage for the company and its shareholders.
Under Much Greater Scrutiny
This is a brief review for board members based on my experience in M&A matters of the top issues that board members and management are considering in an environment in which shareholders and a growing range of stakeholders are taking a much closer look at boardroom actions especially as it relates to M&A.
A critical review of these questions and suggestions may result in a more comprehensive and deeper focus on individual board members and their skill sets and experience that can spell the difference between success and failure in the M&A process.