It is company management which typically proposes, and almost always executes, an M&A transaction. What is the board of directors doing while all this is going on?
A panel at the May 10th Breakfast Meeting of the National Association of Corporate Directors-New England explored major M&A pitfalls. The most important: a proposal of an acquisition transaction which is not in line with the strategic direction of the company. Sometimes CEOs and management teams get excited about an acquisition which is off on a tangent. It is the role of the board to be forceful in questioning any such transactions; is it truly strategic, is it large enough to divert the company, what is the rationale and why should we be doing it?
Sometimes a subcommittee of a board is named in order to pursue a transaction. It is important that the subcommittee keep the board generally informed; no one likes surprises. If, in a large company, smaller acquisitions have been delegated to management, without board input, nonetheless management should be attentive to keeping the board posted so that board members are not embarrassed by a lack of knowledge as to what is going on in the company.
Sometimes stock ownership in a company can impact thinking about acquisitions. In a company with a private equity investor, there is time pressure for exit at a certain point; other shareholders may have an interest in maximizing value over a longer period of time. Sometimes there thus is pressure to achieve an acquisition because the market may be rewarding acquisitions, attracting PEs to overpay in order to maximize early exit value. These issues need to be sorted out by the board.
The board should be attentive to cultural fit. What is the motivation, and style of leadership, of the target and its executive team? Is it overly aggressive, so as to cause the board to ask management to double-check financials and projections? Will there be, in fact, an appropriate fit of cultures?
Directors have the task of making sure that a company fully evaluates an M&A transaction; perhaps the company should walk away. After all, for any major acquisition, it is the board which ultimately must pass upon it. It is the board’s responsibility to grant or withhold approval based on strategic or economic considerations.