In 2016, the National Association of Corporate Directors (NACD) and Protiviti co-hosted a series of roundtables that brought together more than 60 directors to discuss current challenges and effective practices in board-level mergers and acquisitions (M&A) oversight. Based on insights from the roundtables and our experience serving clients in the M&A space, we offer the following keys to the board’s M&A oversight.
1. View M&A through the lens of the growth strategy. Companies pursuing growth through M&A should articulate the strategic underpinnings of the growth strategy. Doing so provides a context for evaluating prospective targets and their strategic fit (e.g., additive to the core business, diversification into a new line of business, entrance into new markets, and/or transformation of the organization). Understanding the strategic context provides a strong foundation for directors and executive management to agree, long before a deal is placed on the table, on the appetite for risk and metrics for measuring deal success.
2. Oversee M&A as an end-to-end cycle, rather than a transaction. The board should focus on the M&A life cycle which begins with identifying the right markets and targets consistent with the growth strategy and acquisition criteria, and continues with:
- Defining and executing a thorough, efficient due diligence process;
- Preparing a robust, phased integration plan to capture targeted deal values;
- Pricing and financing the deal;
- Following up a consummated deal with a well-resourced and effectively communicated execution of the integration plan according to the established timetable;
- Conducting a post-mortem to identify opportunities to improve the process.
Directors should be engaged throughout the process (see next point).
3. Determine the extent of board involvement in each phase of the process. For complex and risky transactions, the board should expect periodic updates at various stages of the due diligence process, as well as on the progress of the integration strategy after approval and consummation of the deal. The board needs to decide where the point of oversight should reside—with the full board or one or more standing committees. To the extent necessary, the board should avail itself of the advice of subject-matter experts on due diligence, tax, valuation, corruption, antitrust, cybersecurity, and other issues.
4. Make sure the critical competencies are in place to execute the full M&A process. It takes talent and expertise to manage the M&A life cycle. Viewing M&A as an end-to-end process provides a powerful context for evaluating the management team’s capabilities to execute each phase of that process.
5. Challenge deal assumptions and expected synergies. When M&A targets are proposed, either the full board or a designated standing or special committee should assess deal assumptions and synergies. Are management’s revenue and cost assumptions reasonable? Are the expected synergies that were reflected in the deal pro formas realistic? Is the integration plan to execute on the assumptions likely to deliver the synergies after consummation of the deal? For complex deals, the board may want management to stress-test deal assumptions against well-defined scenarios and alternative futures before deal approval.
6. Manage senior management’s emotional investment. A clear business case should outline why the transaction is essential to the growth strategy. Deal presentations that hype optimistic projections and accentuate only positive possible outcomes are a red flag. The board should insist that management also provide a balanced contrarian view that articulates the deal risks and what can go wrong—perhaps through a “red team” that challenges deal assumptions to discover fatal flaws and temper complacency that often follows past successes. Executive sessions are another means of ensuring the board has access to candid and dissenting views on such matters as target suitability, deal pricing, and go/no-go decisions.
7. Constructively engage management in due diligence. To accomplish the due diligence objectives, the inclusion of objective third parties on the due diligence team may be warranted, particularly for financial, tax, compliance, human resources, cybersecurity, and industry-specific issues. Despite management’s and the board’s best efforts, due diligence often has inherent limitations when it is not possible to gain access to the required information. Despite these limitations, an acquirer should be cautious about making a deal without sufficient due diligence, even when time may be of the essence. No one should be in a rush to make a serious error.
8. Understand the integration plan and its viability before approving the deal. The board should carefully review management’s integration plan. The review should seek clarity of the plan’s intended purpose, how it is to be achieved, who is leading the effort, and the change management and other obstacles that could frustrate the plan’s execution. The board should satisfy itself that the integration plan is compelling and robust. The plan should engender confidence that management understands how the integration effort and team will deliver the expected deal value, whether through changing the current operating structure, blending talent from the two companies, addressing the technology infrastructure, or overcoming cultural challenges. The board should sign off on the duration of time in which the expected value will be delivered and consider holding leaders accountable even when they have moved into other areas of the company.
9. Stay on top of the integration process. When the deal is consummated, the hard work toward delivering the expected deal value has just begun. Effective integration requires continued vigilance, including periodic tracking of progress, attention to managing cultural differences, making decisions quickly, retaining key personnel, staying on schedule, and maintaining accountability for results. During the NACD roundtables, several directors reported that their boards used information from the pro formas generated during the due diligence phase to hold management accountable through periodic (say, quarterly) reports after a deal closes. The idea is twofold: (a) gauge management’s success comparing pro formas with actual results; and (b) drive more realistic pro formas during the deal evaluation phase. When sponsoring executives know that pro formas will be the board’s baseline for evaluating deal performance, they are incentivized to set realistic integration goals.
10. Continuously improve the process through look-backs. Once significant deals have run their course, the board should consider conducting a post-mortem review of completed transactions to determine what worked well, the lessons learned, and specific improvements to address in the future. Reviews conducted with a focus on learning should not resort to finger-pointing.
In summary, effective board oversight of M&A can create competitive advantage and enterprise value through consummation of successful deals. Likewise, it can help avert the loss of enterprise value through preventable deal failures.
Jim DeLoach is managing director of Protiviti.