Following a merger or acquisition announcement, executives and their corporate attorneys often play a game where they guess how long it will take for a lawsuit to be filed. (The fastest time I’ve heard was seven minutes.) So there is little debate that M&A activity is a lightning rod for criticism—and that only a small percentage of acquisitions are perceived to be a value-add for the acquirer.
With this article, we aim to get our arms around the role that the board can play to ensure that companies make good strategic and/or financial decisions with their growth plans. How can board members mitigate some of the risk associated with merger integration, which can sink even well-researched merger decisions?
To analyze the diligence nuances of M&A activity and the role of the board, TK Kerstetter, host of “Inside America’s Boardrooms,” sat down with Sean Lyons, Partner with Liberty Advisor Group, an expert in merger integration issues. Lyons shared his views on the steps a board can take to mitigate merger-related risk and ensure a successful integration. Lyons is also the co-author of an engaging article titled “The Seven Deadly Sins of Post-Merger Integration.”
TK Kerstetter, Inside America’s Boardrooms: I would guess that the first thing boards should concern themselves with is, “Does this transaction fit into the company’s strategy (whether buying or selling)?”
Sean Lyons: Boards play a critical fiduciary role in maximizing shareholder value—and a key manifestation of that role occurs when a company is considering M&A activity. The board should be challenging management about what businesses they should pursue and how to pursue them in such a way to generate maximum value with an acceptable level of risk. And beyond the strategic lens, the board needs to ensure that the management team is objectively and thoroughly evaluating potential acquisitions and divestitures.
There are so many other dimensions that boards must consider with any M&A activity—from the cultural implications of bringing two companies together to the consolidation of technology platforms. Short-changing these steps during diligence often leads to serious pain during the post-announcement and post-close phases.
Kerstetter: I worry that some boards and possibly senior management teams take a collective sigh after the merger is consummated... but isn’t this really where the work starts to integrate the two companies?
Lyons: This is a common trap that we see. Beyond all the regulatory, legal, finance and accounting steps that are necessary to complete the deal, there is plenty of work to be done, for example, regarding (1) the governance process for the integration, (2) major communications to customers, employees and suppliers, and (3) deeper analysis related to hitting the financial objectives of the deal. At the functional level, the merging of technology platforms can be incredibly complex and arduous. There is a lot of work that can be done pre-close to position the combined entity for success post-close.
Another common mistake we see is when companies declare victory on Day 1. In our experience, Day 1 is the beginning of the race. Management teams mistakenly convince themselves that the bulk of post-close integration work can be addressed by a 100-day plan. Board members need to make sure that the management team is focused on completing the integration, lest they end up fighting battles years later due to lack of integration focus.
Therefore, it is imperative to assign dedicated resources to integration activities. In our experience, it is also an opportunity for the organization to identify and groom the next generation of leaders in the company. Board members should encourage management to seek out such rising stars as candidates for the integration teams.
Kerstetter: Every year, it seems that companies’ reliance on systems and IT (as part of their strategy or service delivery) is magnified. Has this phase of integration become more challenging every year? What questions should boards be asking to ensure that management is on top of this integration priority that’s so critical to success of the acquisition?
Lyons: Technology platforms are critical to supporting key business processes—so much so that it has effectively become a requirement for any executive or board member to be literate in basic, foundational technology concepts. When companies short-change technology integrations during an acquisition, they lose reliable sources of key data (related to their customers, products, suppliers and employees), which enable strategic initiatives during the M&A process, such as assessing top-line growth, internal efficiencies, etc.
Board members must ensure that their management teams don’t fall into this trap by posing basic questions regarding the combined entity: How many customers buy products from each of the legacy companies? What overlap do the legacy companies have in terms of products? What suppliers do both companies use and for what raw materials or common products? If the management team cannot answer these basic questions quickly, they probably have not done a good job with the technology integration of past acquisitions, which will only be exacerbated with additional acquisitions. To be clear, this doesn’t mean that they necessarily need a single platform; that’s often unattainable. The focus should be on common definitions of key data and mechanisms for accessing consolidated views of this data.
Another common technology topic that reaches the board level, particularly for the Audit Committee, is the company’s data security practices. It should be a priority in the context of M&A to ensure that the company does not overlook data security risks of a target acquisition or does not impair its data security practices with a given acquisition.
Kerstetter: What other words of advice would you offer boards whose companies are growing through acquisitions and want to provide prudent oversight and improve shareholder value?
Lyons: The biggest piece of advice I would give to anyone undertaking a transaction is that there is no replacement for sound, disciplined planning and execution. I realize that sounds obvious, but the point is that there are no magic tricks or shortcuts to being successful on these types of initiatives. You need to make sure you have the proper governance in place, you need to maintain a sense of urgency throughout the deal life cycle, you need to have a maniacal focus on hitting the financial objectives of the deal, and you need to make sure you don’t break the business by being distracted or enamored with M&A activities. And that’s the advice I would give a board member, executive or member of the integration team.
TK Kerstetter is the host of “Inside America’s Boardrooms” and a regular C-Suite contributor. See his article in this issue.