Deal-making is back. After a recovery period following the initial shocks of the pandemic, mergers and acquisitions (M&A) activity has rebounded to reach historic levels. A company’s directors can play a critical role in determining whether this uptick in activity will be accretive for those companies that pursue M&A as a growth strategy.

The current environment in mind, here are five areas that boards should focus on when providing strategic oversight and guidance for their companies’ next deals.

M&A Readiness: Be Involved Before a Deal Is on the Table

Be proactive about understanding management’s readiness and preparedness to execute. Determine the following in advance:

What types of deals will the board be involved in? What types of deals (if any) will it not?
Does the company have the leadership, skills, capabilities, capacity, processes, scale, and advisors to successfully execute the deal?
Does the organization have leaders with M&A (or specific deal type) expertise?
What processes and tools does the business have for pipeline management, due diligence, and integration?
What have the board and company learned from prior deals?

Diligence Oversight: Emphasize the Qualitative, Moderate the Pace

Validate the quantitative, and drill deep on the qualitative. Be sure to:

Probe externalities such as market factors, culture, brand, and perception.
Ensure there is a strong focus on broad and deep diligence.  
Incorporate new considerations for areas such as people; culture dynamics; environmental, social, and governance issues; and cybersecurity.
Help moderate the pace, and don’t let the deal gain unsubstantiated momentum.

Also ask: How difficult will it be to achieve the operational objectives that will drive synergies? Where will changes drive the most opposition from stakeholders, and what is the company’s plan to address this opposition? If deal models and integration plans are predicated on unrealistic operational changes, the value won’t materialize. Good operational due diligence is just as—if not more—important than good financial due diligence, and it materially impacts speed to value. Make sure the company has objective inputs with the right industry and integration experience to evaluate and validate model and integration feasibility.

Integration: Stay in the Game for All Four Quarters

Set expectations on the metrics you will monitor over the course of the full integration, and be mindful of the time frame. Retention is a great example of an area in which the organization’s measurement needs to extend beyond key personnel. Similarly, the time horizon for measuring retention should be years, not months, after close. Slow and quiet value leakage from poor retention is extremely expensive.

Be ready to pivot when the company finds things that were not uncovered during due diligence. The best plans are encapsulated in an agile decision-making framework. Establish the rapport and processes with management that allow the company to adjust, resolve, and reposition if new information prompts different priorities.

Portfolio Optimization: Evaluate the Full Portfolio

Look beyond the next deal to scrutinize how management evaluates its deal-making over time. Most corporations don’t actively manage their portfolios like their private-equity counterparts do, at least not until there is a problem.

The issue with this approach is twofold: First, it assumes all deals are done well and for life. The reality is that tomorrow will likely not look like today, and deals that delivered on their objectives yesterday might not serve the organization’s future vision or needs. Second, waiting until there is a problem compromises the organization’s ability to optimize the value of any deal. No one pays top dollar for a “do-or-die” deal. M&A capital allocation needs to be a proactive, deliberate process.

Ask the management team to describe its enterprise portfolio optimization process, which could also include having a third party complete regular, objective reviews. The process should consider substantive differences in performance across portfolio companies, divisions, or business units; capital funding requirements; valuations; and alignment to the company’s current strategy and future direction. Outputs should include an executable road map that identifies performance improvement opportunities, considerations for restructuring or divestitures, and recommendations for targeted organic or inorganic growth.

Divestiture: Be Prepared Sell-Side

Following a consistent enterprise portfolio review process will no doubt yield strong candidates for divestiture. Although transparency to buyers has not been the norm historically, the limitations of the pandemic (e.g., a lack of in-person management meetings and site visits) have revealed some of the potential advantages of increased transparency. Buyer visibility into synergy opportunities, road maps, examples of quick wins, and clear separation and integration plans increase speed and value and also reduce risk, friction, and transaction costs—creating win-win outcomes. Transparency can also help the company pressure-test the decision to divest, as it may reveal entanglements and new assumptions about markets.

As one of our clients says, “High-consequence decisions are always improved by high-quality debate.” The board has an important role to play in scrutinizing a company’s M&A activity for strategic alignment, readiness, and progress against expected outcomes, in both the short and long term. Furthermore, ensuring management has processes in place for ongoing enterprise portfolio optimization is equally critical. Focusing on the right areas with management and deal teams can determine how much value an organization’s next deal can realize.

Colin Harvey is a managing director with Alvarez & Marsal’s Corporate Performance Improvement (CPI) practice in Austin and the national solution leader for CPI’s Corporate M&A Services.

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