Boardroom Briefing: Mergers & Acquisitions - Directors & Boards

Making the Best of M&A
By Jay W. Lorsch
How boards can improve the success rate of M&A activity
Since the
corporate
scandals
of 2001 and
the passage of
the Sarbanes-
Oxley Act,
board members
have found
Jay W. Lorsch themselves
heavily involved with issues of
compliance to new rules, especially
those pertaining to financial
reporting. New SEC regulations about
reporting executive compensation
are likely to further occupy directors’
time. These changes in the boardroom
environment frustrate many directors
who believe a more important
responsibility should be to oversee
their company’s strategic direction.
What is not always clear to these
directors, or to me, is precisely what
they mean by “strategy.” Do they
simply want more involvement in
matters related to the functioning of
the business, or are they concerned
about long-term goals and the means
to attain them? However individual
directors answer these questions,
one fact is clear—at the heart of
any board’s strategic responsibility
are decisions about mergers and
acquisitions. Whether friendly
or hostile, whether the acquirer
or the acquiree, boards become
involved in decisions about business
combinations as a matter of company
by-laws, charters, and custom.
Obviously this is not the only way
boards become involved in company
strategy, but it is one of the most
significant in terms of frequency
and impact. In addition, it is highly
problematic because these business
combinations frequently do not
live up to either the board’s or
management’s expectations.
What can boards do to improve
the rate of success in mergers or
acquisitions? Here are a few ideas.
Be Clear About
Your Legal Situation
There is often a presumption by
directors that their only legal
obligation in such matters is to do
what is in the best interest of their
shareholders, especially when they
receive an offer for their company.
M&A is not the only way boards become involved in
company strategy, but it is one of the most significant
in terms of frequency and impact.
While directors should be concerned
about shareholder value, this does
not necessarily mean selling to
the highest bidder. Nor should
directors expect a target’s board to
automatically accept the highest offer.
The laws are more complicated than
that and include the right, under some
circumstances, to say “no thanks.”
Boards should consult with legal
counsel to understand their legal
options clearly and completely.
Do Your Homework.
Ask the Right Questions.
Boards will receive a lot of
information about such transactions
from their management, lawyers,
and financial advisors. These parties,
however, may have motives that
conflict with what is best for the
company or its shareholders. To put it
plainly, these folks often want the deal
to go through because it is in their
self-interest. Directors must be the
objective partner in such deliberations
and do their individual and collective
homework to counteract such bias.
To achieve this, board members must
be well informed about their own
company, as well as the other party,
and they should be asking these kinds
of questions:
• Are the financial projections/
business plans realistic and valid?
• How might the current business
environment change?
• What will the new company look
like financially and competitively?
• Who will lead the combined
company and what will the
organization chart look like?
• What will the cultural fit be
between the two organizations?
• What changes in personnel,
financial structure, and competitive
strategy will be necessary for the
deal to work?
B o a r d r o o m B r i e f i n g : M e r g e r s & A c q u i s i t i o n s