Members of a board of directors of an acquiring or selling company are faced with challenges and special considerations during the entire process of the deal. These challenges and considerations may even differ depending on facts surrounding the deal or even the business of the parties (i.e. whether the board is defending a hostile bid or selling to a private equity firm). Regardless of the deal, there are certain questions that all directors must face and thus receive most of the attention. These questions focus around the following:
- What is the right price?
- What are my duties?
- What are the conflicts?
However, when determining whether a merger or acquisition is in the best interests of the corporation and shareholders, directors should consider two key areas that are often overlooked:
- Culture of the Organizations
The Board’s Roles in Integration
In today’s world where more and more mergers and acquisitions are facing scrutiny from shareholders and investors, directors at the beginning need to actively analyze not only the “why”, but more importantly the “how” of the transaction, including how the companies will be integrated.
The board has a duty to oversee the integration of the combined entities and ensure that the acquirer has a well-thought plan for integration to begin immediately after the transaction closes. To ensure the best chance of success for the new combined entity, both management and the board should consider such integration plans even before the transaction is approved.
This plan should be reviewed by the board to confirm that the benefits considered by the board when making its decision to approve the transaction (i.e. the synergies of the two organizations) will be fully realized post-closing. Failure to do so could result in a deal that doesn’t accomplish its financial objectives and may expose the board to questions and liability.
In assessing any integration plan, the board needs to identify the leaders of the combined entities and more importantly, their roles and responsibilities as well as benchmarks to be achieved after the integration. Depending on the size of the merger or acquisition, the plan should consider the creation of an integration committee to oversee the process.
Directors should ask to review the integration plan and determine who is accountable for its implementation. If a plan has not yet been developed, this request will help the deal makers to focus on the “how” of the deal. If a plan has been developed it will likely cover a list of actions necessary after the close of the transaction, a communication plan with customers, clients, employees, and the plan for new company to add value from the acquisition in the form of cost savings or increased revenues.
As with any transaction, the board should carefully consider how the acquisition will help to reduce costs and increase revenues to maximize shareholder value. It is likely no surprise that a fair percentage of mergers and acquisitions do not succeed. Reasons for such failures include overpaying for the target, not fully understanding the target, and a clash of cultures. Still, even if the purchase price is adequate and the cultures mesh, a failure to plan for the integration process can result in a failed transaction.
To protect itself, and help maximize the value of the new entity, the board needs to look beyond the “why” and analyze the integration plan and work with a process that preserves the business judgment rule to provide itself with the most protection. This includes the use of a special committee, reliance upon detailed strategic plans, and spending a considerable amount of time deliberating the acquisition thoroughly.
The Board’s Role in Assessing the Culture of the Organizations
As part of understanding the “how” of the transaction, one element the board is sure to face is assessing “how” the cultures of the two organizations will mesh together. Simply put, the board should consider how the culture of the target company may differ from that of the acquirer, including what must be done on a going forward basis to ensure a successful combination of the two organizations. This analysis helps illustrate for the board potential risks with the transactions and identify what will need to be monitored during the integration process to ensure the long-term viability of the combined entity.
A company’s culture influences its long term financial performance and success. Given its direct impact on performance, the board should consider oversight of culture as part of its duties, especially when assessing the culture of entities that the board is considering acquiring or merging.
In assessing the culture of the two organizations, the board will need to determine whether there is a proper fit. Differing cultures does not necessarily mean that two organizations will not succeed as a combined entity, but it does create greater risk of failure. This assessment by the board will help build on the differences that led to the target’s success and understand the risk associated with combining the two cultures so a plan can be developed early on in the process to promote success. Without fully knowing and understanding the cultures of the target company and the acquirer, the combined entity may start off on the wrong track and may never be able to get back on track.
The Board Needs to Focus the Vision of the Transaction
It is important to remember that in any transaction, the board sets the tone and therefore it is crucial to focus on what information it will need to make a decision. This requires having the vision to consider and address up front not only “why” a merger or acquisition makes sense for an organization, but also “how” the merger or acquisition will succeed. Specifically, boards should pay close attention to how close the cultural fit of the two organizations is; the impact of the two entities going forward; what it will take for the combined entity to survive; and how to measure the integration early on in the process so necessary adjustments may be made and the combined entity is given the best chance for success.