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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
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