How does a board of directors, faced with a pending acquisition which has management enthused, discharge its duties to shareholders? This discussion was one topic at the June 9th meeting of the New England Chapter of the National Association of Corporate Directors in Boston. An experienced panel of directors seemed to agree on a wide variety of approaches:
The board should first establish a strategic articulation of which kinds of acquisitions they believe will build value of the company. Proposed acquisitions should be tested back against this strategic approach, notwithstanding management impetus to the deal. Management can get very competitive, may be in love with the deal and may also want to “win” the fight to capture the target. The board must control that tendency.
But what about opportunistic acquisitions? They are the hardest to evaluate; they may indeed be valuable but if they don’t fit the prior strategic discussion, that means no preparatory work has been done. The board’s role: work really really hard because you have to drill down and do both the strategic work and the operational work to evaluate the deal. One director noted that sometimes the company will have one M&A advisor and the board will have its own separate advisor.
What is the board’s role in diligence? As with many things, the board should be performing the function of a monitor. Directors should identify the biggest issues, the biggest risks, and should ask questions that address those risk parameters. Also, questions should be asked concerning post-acquisition planning; is it in place? Has management evaluated the human talent being acquired, does management have the bandwidth to integrate the acquisition?
Finally, the board has a role in interrogating the post-acquisition financial model that is presented. That model must be based on a variety of assumptions. Those assumptions should be fully understood by the board.
See the next blog post to address questions of integration and focus on “the culture” of the two enterprises; whatever “culture” means. . . .”