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Apr 30, 2008

Board’s role in M&A

Acquiring company directors have big role to play on deals

In  this age of shareholder rights and director fiduciary responsibility, a lot of attention is being focused on the board’s role in mergers and acquisitions. Most of the attention looks at the way a board responds to outsiders making a buyout approach. There is no doubt that the board needs to evaluate the transaction, taking into account the long-term benefits of the takeover and the impact on shareholder value. Yet the other side of the equation is equally as important: the board of the acquiring company must also act in the best interests not only of the company, the management and itself, but also of shareholders.

A lot of companies in recent times have rushed into buying competitors in order to achieve access to new markets. But as Chris Brown, president and CEO of TechTeam Global, points out, just because you can get something for a good price does not make it a good deal. ‘The question the board really needs to consider is: Is this a deal we really want to do that makes sound, long-term strategic sense versus is it the right price?’

Price considerations should really be secondary when assessing the merits. Steven Hilfinger, a Foley  & Lardner partner, suggests developing a formal ‘rules of engagement’ policy that the board and management can follow in determining whether or not to take a deal to the next level.

‘There is some credit to doing this although it is more a theoretical exercise,’ explains Bryan Armstrong, an executive vice president with FD Ashton Partners. ‘There are some questions that should be asked as a matter of routine and some policies should be in place to ensure the issues that need to be considered, are. Is the transaction accretive? Does it enhance management talent? Does it fit with our stated short-, mid- and long-term targets? If the deal falls down in any of these areas then maybe you need to rethink it.’

Others also focus on process. ‘We have a standard strategy and investment committee that meets regularly to assess any merger deals,’ highlights Brown. ‘Once this committee thinks a transaction is a good idea then we go to a full board meeting.’

That then raises the question of how far a CEO should be able to develop a deal before bringing it to the board. If management communicates too early, it can be handcuffed by the board and risks wasting its time before having sufficient details. However, bringing the board in at the end of the process jeopardizes the due diligence process.

The board needs to be involved fairly early because it is easy for a CEO to ‘fall in love’ with a deal. ‘There are a lot of reasons that management might want to get a deal done and it is important for the board to be dispassionate and act as a speed bump and ensure the deal is getting done for the right reasons,’ says David Drury, CEO of Poblocki Sign Company.

But the board also needs to tread carefully. ‘It is easy for management and the board to antagonize each other if they appear too set on any one outcome,’ explains Drury.

Finally, the board needs to consider cultural fit, which can be just as important as deal points. A mismatch of the ethics and compliance cultures or the general approach to conducting business can dim the long-term prospects.

Brendan Sheehan

Brendan Sheehan is the former Executive Editor at Corporate Secretary magazine, and is a leading expert in public company governance and compliance. He regularly lectures on cutting edge governance, risk and compliance issues and is a regular...