The M&A Board Game

The M&A Board Game

“The most important thing is to have a board member or a board committee that is engaged in the oversight of the acquisition process. You’ll find that typically it is the CEO and COO who have to work through the actual integration details.”

In many instances, the high-failure rate of mergers can be attributed to a lack of engagement by the board. All too often, the focus is on quick gains rather than addressing the cultural and operational challenges of integrating another company, not to mention the issue of ensuring that long-term value is embedded into a business.

Pascal Colombani, Chairman of car parts manufacturer Valeo, comments, “It requires a lot of work from the chairman to make sure that different cultures can work effectively together. This can take many forms: selecting what the two companies do best in terms of governance is obviously important, and [to allocate] committee chairmanships is also seen as a key step towards good integration.”

The process of bringing two cultures together needs to be managed strategically. Dipesh Shah, Non-Executive Director of JKX Oil & Gas plc, says, “The most important thing is to have a board member or a board committee that is engaged in the oversight of the acquisition process. You’ll find that typically it is the CEO and COO who have to work through the actual integration details.”

It’s a point taken up by Jeremy Small, Group Company Secretary for insurance provider Axa UK plc, who says that in order for the board to not mistake legal completion for the end of the deal, they should give NEDs oversight responsibility for the integration.

He explains: “This is helpful as it clearly delineates responsibility. The executive team, usually in the form of an integration steering committee, is responsible for running the integration process and they report to an NED-led oversight committee. The latter can, and should, operate at a more strategic level, monitoring progress against integration targets and providing advice and direction when needed as well as reassurance to the whole board.”

Siva Shankar, Corporate Finance Director at commercial property and development company SEGRO plc, recommends that key performance indicators are brought into play to highlight the true health of the delivery of a merger. “The carefully selected KPIs should measure all the vital signs of integration success or failure and be quickly digestible,” he says, noting that short-term incentive schemes can also be introduced when integration milestones are reached.

Gwen Ventris, Former COO, Europe and Executive Director for energy and environmental consultancy AEA Technology plc, also stresses the importance of targeted remuneration: “Reward for success should be cumulative with actual payments taking place at least two years into the plan to ensure that key players remain with the business and are focused on what can be extremely challenging work.”

Shades of perfect

Anyone who has been closely involved in a deal will know that it’s impossible to get everything right. Intellectually, there may be a strategy for how a takeover ought to be done, but even the smallest transactions are likely to contain a host of highly charged problems and emotional surprises.

“The scale and nature of deals can be complex, time consuming and extremely demanding for key executives who can very often be suffering from deal fatigue by the time they reach closure stage,” says Gwen. “These early stages of acquiring can be dominated by finance and legal matters which naturally demand the attention of the board, whereas integration can be perceived as a more operational matter and therefore ‘business as usual’ to the board.”

Invariably, the opposite is the case. Sir Peter Mason, Chairman of Thames Water Utilities Ltd, observes, “Post-close, at the end of what will have been a challenging period, the board shouldn’t congratulate itself as ‘job done’. In fact, the job is only just starting if the integration is to be executed properly.”

Carlos Keener, an M&A expert and founder of M&A integration specialist Beyond the Deal, says, “Executive teams can lose interest or they just focus on running the business. They may not have sufficient governance processes or people in place to make sure that integration goes well. You could argue that the reason this happens is because the board is pushing them in that direction…They are reacting to what the board is telling them is the priority. I still think there is a role for a greater awareness by boards of not just what integration is likely to entail, but what positive role they can play in making sure that executives can deal with it properly.”

Weak foundations 

In the zeal and enthusiasm to execute a deal, it’s easy for compromises to be made in terms of the appointments made to the board, which compound the difficulties posed by integration. Clearly, if the appointments are more based on political horse-trading than actual merit, the subsequent inefficiencies in the boardroom may lead to in-fighting and a lack of leadership that can infect an entire organisation.

“The seeds of the difficulties are planted when concessions are made for a recommended merger, such as who is going to get a position on the board,” comments Dipesh. “You can end up with a top heavy structure which cannot be sustained for too long.” Gwen argues that “making appointments as a ‘reward’ for pulling off the deal, without due reference to the future strategic agenda, skills and capability requirements, rarely works”. Likewise, problems can arise from the acquiring company dominating the executive and board composition of the new entity. “This…may undermine the morale of the acquired company’s executives, leading to disillusionment, resistance to change and [finally] key employee turnover,” she adds.

Alison Carnwath, Chairman of commercial property company Land Securities Group plc, states that due care and consideration has to be given to the blend and make-up of the NEDs: “Chairmen, with their nomination committees, should always pick the best boards for the medium to long-term. During negotiations of friendly mergers, this task can get overlooked and not addressed. Sometimes the executive roles are agreed, along with the chairman, but others are told that decisions will be made at a later stage post-integration. This creates uncertainty throughout an organisation. Similarly, non-executive directors are often selected capriciously and boards can become very large to avoid difficult conversations.”

Change is inevitable

The term merger is slightly misleading as there is usually an acquiring company driving the deal, meaning there will be casualties where there is operational overlap or underperforming service lines. Julia Robertson, Chief Executive, UK & Europe Staffing, Impellam Group plc, says: “In a newly merged organisation, people know that change will follow so don’t patronise them by pretending it won’t…Strong and decisive leadership is essential. Putting together a ‘politically correct’ board in an attempt to satisfy all parties is likely to lead to stagnation.”

Jeremy says: “The most common pitfall regarding board composition tends to be one of two types: total dominance by the acquiring company’s executive team or ‘man-to-man’ marking of taking individuals from each side. Neither works particularly well as the first tends to erode remaining morale among the target executives and staff, while the second often leads to deadlock and a lack of action either because it is very difficult to enforce decisions or because no one wants to commit to making them.”

There will never be the perfect acquisition or merger, which is why so many of them are judged to be failures based on of the ‘synergies’ proposed at the bidding stage. As ever, there has to be candid and direct communication between the executives and the board about how the deal can be executed, along with a plan about what the integration process will be so that long-term value is at the heart of the transaction. In theory, there are five key questions to ask:

•    Post completion of the deal, if the board is top heavy, when can it be streamlined?
•    Does the board have oversight of the executive team on integration?
•    How are individuals being incentivised to deliver results?
•    What compromises have been made to complete the deal?
•    What is the timeframe for merging the two businesses?

Carlos says: “We find most of the challenges of helping companies to integrate are because of decisions that were made pre-deal or due to the lack of sufficient assessment of problems – or wilfully ignoring them – just to make sure that the deal happens. There are always going to be challenges in any deal, be it cultural or operational. It’s vital to recognise what the issues are so they don’t bite [the company] two to three years later into the deal.”

If joined-up thinking and basic accountability aren’t codified, things can soon go wrong. Dipesh comments, “You can talk a good story and say that this is what you are going to do by meshing the companies together to create a new culture, which will sustain ‘us’ into the future. You can tell a good story, but when you actually start implementing [the integration], that’s when you do need to knock them together.”

It’s a big task. One that the board as much as the executive team need to embrace head-on.

I hope to see you soon

Matthew

www.twitter.com/criticaleyeuk

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