Issue #12                                                                                              December 2019
The role of board of directors in M&As
by Professor Nuno Fernandes
Big mergers and acquisitions (M&As) make their first splash in the headlines based on the price tags attached to them. “Abbvie acquires Allergan, $63B”, “United Technologies acquires Raytheon, $121B”, “Comcast to buy Sky, $39B”, etc…

It should come as no surprise then that M&A decisions are some of the most important decisions an involved board member of a company will have to make. Quite often, they also happen to be the sort of decision that board members have very little experience making. 
Many board members and top managers have worked on one, maybe two, highly consequential deals in their professional lives. And the process in its entirety makes up some of the most challenging and risky endeavors they encounter in their capacity as members of a board. Given the fundamental role that board members play, they must themselves be knowledgeable about the process that companies should put in place to maximize their value creation following an M&A. Members of the acquiring company’s board must exercise caution and avoid appearances of going overboard. Specifically, investors will be closely scrutinizing them for ominous signs of empire building or overpayment. 
Directors of the target company are also scrutinized, namely for perceived breaches of duty should the deal go awry, or for too much money being left on the table.  Even if financial or legal liability are not issues, there are reputational repercussions to keep in mind. This means that board members must become well-versed when it comes to knowing and identifying the potential pitfalls of M&As when the waters are calm. During a deal, it’s too turbulent for beginners to start learning about M&As. 
I’d like to offer board members a few pieces of practical advice taken from my latest book “The Value Killers: How Mergers and Acquisitions Cost Companies Prevent It”. To start, they should not have blind faith in the valuations of external advisors (e.g. investment banks), which are oftentimes driven more by success fees than an interest in seeing a deal flourish. Acquisition targets being overvalued is one of the main reasons companies destroy value mergers. Board members should be able to confidently supervise executives on potential transactions and challenge their opinions regarding a deal. They should be thoroughly knowledgeable about the specifics of each deal, and how to best create value through it.
In a business climate marked by escalating global competition and industry disruption, successful M&As are increasingly vital to the growth and profitability of many companies. However, the evidence is clear: the majority of mergers fail. They destroy shareholder value and cost companies billions. Importantly, this is not an ill-fated outcome where loss is inevitable. There are recurring, unsuccessful patterns found across many calamitous mergers. Board members are the final guardians of shareholder value. And a good board should be able to steer companies away from value-destroying deals.

Nuno Fernandes 
Professor of Financial Management
IESE Center for Corporate Governance
IESE CCG-ECGI Corporate Governance Conference

The IESE Center for Corporate Governance (IESE CCG) and the European Corporate Governance Institute (ECGI) co-organized the “Corporate Governance and Ownership with Diverse Shareholders” conference, which took place at IESE's Barcelona Campus on October 25-26, 2019. The high-level event gathered the leading scholars in the field, CEOs and top executives, chairs of boards, investors, regulators, and multilateral organizations. Check out the highlights of the conference in this summary video:


Corporate Governance News

Elliott defies Capgemini
Activist hedge fund Elliott, which holds an economic interest in Altran, publicly shared that Capgemini’s bid for Altran was too low… read more
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According to Reuters, Repsol has become the first leading energy firm to commit to a net-zero emission target… read more
Fitch to further integrate ESG risk analysis in reports
Credit rating agencies are moving forward in the process to identify ESG risk both in publicly and privately owned companies… read more

In Case You're Interested...

UK stewardship Code 2020

On 24 October, the Financial Reporting Council (FRC) published the revised UK Stewardship Code 2020 (the Code), which takes effect starting January 1, 2020… read more

Withdrawal of the UK and EU Rules on Company Law 

The European Commission has issued a notice to stakeholders on the consequences of Brexit for the application of company law in the UK. For further information, click on the link and go to the last section titled “Documents”… read more

2019 Report on Corporate Governance and Executive Compensation

France’s Autorité des Marchés Financiers (AMF) has conducted an annual review of the disclosure of listed companies in the areas of corporate governance and executive compensation. The report serves as an occasion to review developments in France and Europe on the subject, such as the provisions of the PACTE Act or the European Commission’s ambitious sustainable finance action plan. The 2019 report provides an overview of the inclusion of social, societal and environmental responsibility criteria in the various governance codes in Europe… read more

IESE's Recent Research on Corporate Governance 

“The Value Killers: How Mergers and Acquisitions Cost Companies Billions - And How to Prevent It”

Book (October 2019)

“The Mutual Friend: Dual Holder Monitoring and Firm Investment Efficiency”

Journal article (November 2019)

Journal: Review of Corporate Finance Studies
Authors: Antón, Miguel; and Lin, Luca Xianran
Read summary

“Political Connections and the Informativeness of Insider Trades”

Journal article (Forthcoming)

Journal: Journal of Finance
Authors: Jagolinzer, Alan D.; Larcker, David F.; Ormazabal, Gaizka; and Taylor, Daniel J.
Read summary

“Beyond the Target: M&A Decisions and Rival Ownership”

Working paper (December 2019)

Authors: Antón, Miguel; Azar, José; Gine, Mireia; and Lin, Luca Xianran
Read summary

Upcoming Programs

Executive Program: “Consejos de administración responsables”

Date: January 28-29, 2020
Location: IESE, Madrid Campus
Visit the program website

Executive Program: “Value Creation Through Effective Boards”

Date: May 18-21, 2020
Location: IESE, Barcelona Campus
Visit the program website

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