Certain things have contributed to the recent explosion of activity in M&A markets including Chief Executives pursuing big ticket deals which they planned during the pandemic, private equity companies sitting on almost $1.6 trillion of uninvested cash, according to the Wall Street Journal, and blank-check companies having raised record amounts this year.
But, as we know, the success rate of M&A deals isn’t too great with the often quoted 60% failing to increase shareholder value, leaving the Board open to criticism for not achieving a better deal. So how can Board members be on the front foot and ensure they are valuing the business, negotiating the best deal for all shareholders, managing risks, and ensuring a smooth post-merger integration?
According to a KPMG survey, over 30% of Board members don’t feel their role in the M&A deal process is fully optimised. The further away from the company’s strategy creation, the less Board members feel involved; for example, feeling less involved and engaged in monitoring post-merger integration activities and systematically evaluating proposed M&A transactions.
The Board’s role in M&A involves asking questions to check the following:
- If the deal is consistent with the organisation’s growth strategy
- What the deal thesis sets out in terms of what and how to integrate
- How the deal creates shareholder value and delivers the growth and cost synergies
- The pace of delivering value and ensuring the integration is seamless from all perspectives
The Board also needs to be attuned to potential management bias that arises – they may have fallen in love with the deal. They also need to ensure lessons are learned and adopted for future mergers and acquisitions.
In my experience there are four areas to watch for – alignment of the deal with company strategy, over optimistic valuation and projection, due diligence not being broad enough and post-merger integration planning and execution that fails to deliver the synergies in a timely way.
From a strategy perspective this is:
- Analysing the maturity of the company in M&A to help determine the Board’s role
- Testing and challenging the alignment of the deal with the company’s strategy
From a valuation perspective this is:
– Evaluating the potential value created by the deal and considering its fit in line with the company strategy
– Testing the valuation with industry norms
From a due diligence perspective this is:
– Understanding the target’s key risks, including financial, ESG, DE&I, operational and market risks
– Getting under the skin of possible cultural issues – how behavioural norms and values will need to converge
From a post-merger integration planning and execution perspective this is:
– Ensuring the post-merger integration plan is in place and is detailed and robust
– Adjusting the plan during the due diligence process as risks, issues and opportunities emerge
– Monitoring to ensure flawless execution and drive out of the growth and cost synergies
In addition, the Board needs to satisfy themselves on the following:-
Diversity, equality and inclusion (how will the merged entity manage DE&I even better)?
Business planning (how to integrate the newly acquired entity with the strategy and financial planning)?
Cyber security (making sure it’s a key consideration in due diligence and integration)
ESG (moving from risk avoidance to value creation measures)
Managing due diligence and integration in a hybrid working world where face to face interaction becomes more limited and so it’s harder to read the cultural nuances and build strong relationships.
Given the nature of what is being undertaken, the right Board composition is critical in enhancing its effectiveness and value add in the company’s M&A process. You need skillsets that combine finance, digital and technology, culture including diversity, equality and inclusion, M&A due diligence and integration and ESG. Often I‘ve found that Boards don’t have this combination of skills to bring to bear on the deal and be the test, challenge, and coach of the management team. To address this, it’s about building board effectiveness to undertake M&A which involves:
- Acting on Board assessments and using the annual self-assessment to help ignite discussions about Board composition refreshment. Having a robust Board assessment process can offer insights into how the Board needs to evolve in line with the company strategy, which should include inorganic growth ambitions.
- Thinking through Board succession planning which is essential to promoting Board refreshment. This involves thinking through the current state of the Board, the tenure of current directors and the company’s future needs.
- Broadening out the definition of diversity and the pool of potential candidates. Often, Boards recruit new directors by asking existing directors for recommendations, which then gets passed to head hunters. This can create an insular pool of potential candidates. The best forward-looking Boards expand the universe of potential qualified candidates by looking outside of the usual places.
Taking these actions to refresh the Board skills and composition ensures there is consideration for all aspects of M&A, lessening your risk of being in the 60% of deals that fail to increase shareholder value – which the Board is held accountable for when it comes to the measure of M&A success.