The Board’s Role in Mergers and Acquisitions
Investors are optimistic about the value of big deals behind a growing wave of mergers and acquistions. What key trends do they need to understand?
February 2013 | by David Delaney
In many conversations with senior executives and corporate directors, we’ve heard variations on the theme that deep board involvement in mergers and acquisitions (M&A) encroaches on the line that separates governance from management. That line is critical. Yet our experience suggests that when it comes to M&A, many boards and management teams are drawing it in the wrong place.
Consider the stakes: many large corporations depend on M&A1 for growth, and by executing it well they can significantly boost the value those deals create. But poorly executed M&A can saddle investors with weak returns on capital for decades. What’s more, the margin between success and failure is slim. In most transactions, the net value creation to the buyer is usually a small fraction of the deal’s value and therefore easy to wipe out with indifferent execution or ill-informed economic assumptions.
Many boards, reluctant to cross the line between governance and management, miss opportunities to help senior executives win at M&A. Boards are well placed to take a long-term view of a deal’s value: the CEO or the business-unit leader may have tenures shorter than the time needed to realize it fully. Boards are also well positioned to challenge the biases that often cloud M&A decision making and goal setting. Furthermore, the diverse experiences of board members with long leadership careers in different corporate settings can shed useful light on common organizational risks in deals. Finally, boards can embolden senior management to pursue promising deals that may seem unfashionable or likely to be unpopular with investors initially.
Of course, a board cannot substitute for an effective management team. Yet it can play roles that go beyond the legal, regulatory, and fiduciary obligations that virtually every board fulfills on M&A—thereby helping executive teams to pursue deals and manage the associated risks in ways that create more value.
This final role is crucial because M&A is central to the strategy of many value-creating companies. Active M&A programs offer a window on the external world—product innovations, talent, new business models—and a way to bring fresh skills and ideas to the development of new products and geographies. They also help leaders keep corporate portfolios vibrant by training resources on the most attractive businesses and avoiding inertia in the allocation of cash and talent. In short, the benefits of M&A often transcend those of individual deals, making boards that engage with it better able to fulfill their broader stewardship functions.
Boards can help management along three dimensions.
As part of a board’s corporate-strategy oversight, the board and management must agree on the role M&A plays in creating value for shareholders—how material is that role, which of course varies across companies, and what critical sources of value can M&A provide? The dialogue between management and the board about sources of value must be quite specific, and the board should know how those sources fit in with the prospective deal pipeline, whose size, flow, and quality help determine the performance of M&A. While active involvement in the pipeline by the full board is rarely feasible or desirable, the board should periodically review it.
Even if a company doesn’t appoint a single executive to oversee M&A, it must have clear organizational-structure and process linkages between the creation of a healthy pipeline, the closing of deals, and their integration. The board can help the CEO and CFO become more explicit about the roles of the corporate center and business units in M&A and a permanent M&A organization’s ideal scale and scope. Moreover, the executives leading various elements of M&A can significantly affect the creation of value. It’s often harder to provide mentorship for these roles and to develop in them. They deserve the same attention from the board as do, for example, business-unit leadership roles.
Directors should read and challenge their company’s M&A playbook—its guide for the types of deals it pursues. The playbook typically covers topics ranging from capturing cost synergies to integrating IT to jump-starting growth, and translates M&A strategy into specifics for delivering value. With the playbook in mind, a board can also help make M&A decision making more effective. The board should ensure that the company structures each phase of decision making to counter risks ranging from risk aversion in the early stages to biases in financial analysis to deal advocacy in the final stages. Once a deal is complete, boards can ensure that its performance is transparent, with incentives tied to realizing its full value.
This level of engagement will be outside the comfort zone for some executives and directors—but need not cause friction between them. In fact, it can align the board and management on the need for bolder transactions with more upside potential. The risks will be clearer all around, while management will be able to focus on capturing value instead of securing the board’s approval. Above all, greater engagement can convert what is typically a sequence of discrete deals into a set of ongoing deal processes and dialogues to deliver value from M&A.