When it comes to major corporate deal-making like mergers and acquisitions, boards of directors tend to act only in reaction. A third party or management presents an opportunity, or even a bid for a target company, and the board then tries to make sense of its options in a hurry-up, one-off evaluation process.
A board needn’t–and shouldn’t–work that way. Arlen Shenkman and I have been involved in a number of large deals over the years, and we have seen how boards can make a big difference, for good or for bad, depending on how well they manage their roles and their oversight. The role of boards has been expanding and evolving, and in the wake of investor lawsuits and court decisions arising from failed deals, they’ve been increasingly targeted for vague oversight, use of inept or conflicted advisors, or weak procedures.
I recently talked with Shenkman about how boards can play a more effective role in supporting, reviewing and even negotiating deals. Shenkman, a longtime business software executive, has led teams responsible for more than 40 acquisitions, and he is currently vice president of corporate development at SAP. He’s also an attorney. I am former chief executive officer of Clear Standards, which in 2009 was acquired by SAP, and I’ve served on boards of companies including Polycom, Reynolds American, Chicos, Lucent, SunPower and Vonage.
Here is our discussion:
Betsy Atkins: Many boards could benefit from enhancing their oversight structures and evaluation processes for mergers and acquisitions and other strategic transactions. But the time to develop those processes is before you need them, not in the middle of a transaction. Many boards don’t think of the need until they’re in the depths of negotiation, and by then it’s probably too late.
Arlen Shenkman: I agree, Betsy. In doing deals, I often see that a board doesn’t have a member with deal expertise, a deal professional. I find that interesting. Boards generally have one or more financial experts, and experts in their industry, but they lack the deal expertise that can be important to the life of the company. A board should set up deal-making ground rules well in advance of any specific deal assessment, whether buy side or sell side. The board should know its role as well as its duties in the context of deal-making. Being prepared is especially important for surprise inbound deal opportunities or management-led offers.
Betsy Atkins: I like the idea our board uses at Polycom. We have a standing special committee called the “strategy committee,” and it’s made up of the chairs of the compensation, governance and audit committees, so all its members are fully independent. Our job is to regularly review, evaluate and give input to management on strategic direction and potential partnerships and deals. The strategy committee sets the parameters that management can use to do smaller deals on its own, and it gives us a good on-the-spot mechanism for reviewing bigger ones, including potential offers for the company itself.
Also, the board should challenge the management team to assess its role in deals in advance. For instance, a CEO should preemptively build relations with potential “white knight” acquirers in anticipation of unsolicited bids. The board needs to ask management about these pre-planning activities, and they should be directed and overseen by the board.
Arlen Shenkman: Good pre-planning by the board can do much more than avoid confusion and missteps. A strong, independent board deal process, structure and record-keeping are important for later legal challenges. Any type of public company deal you do today–strategic, going private, whatever the rationale–is likely to result in a shareholder suit. It’s a question not of whether the company and board will be sued but of how quickly and effectively claims can be overcome. Strong board process helps a lot.
Betsy Atkins: Once the board has effective processes, it then needs to set strategic priorities for various types of transactions. Then it should ensure that management, the advisors and the other people involved in the deal frame the transaction to agree with that strategic road map. This allows the board to provide effective analysis and oversight of any process.
Arlen Shenkman: It’s also important to make sure the board understands the complexity and rationale of a deal. Some of the measures are objective, like market multiples, but some are more subjective–cultural fit, channel strategy and how badly a target company is needed. We made this work well at SAP with our Sybase acquisition earlier this year. We were able to make a strong, well-thought-out move into mobile technologies, and we had solid support from both boards.
Betsy Atkins: I’ve noticed that. SAP may be big, but I’ve also found it to be a nimble expert in making smart technology acquisitions. As I mentioned earlier, expertise on the part of a board’s advisors and bankers, particularly industry knowledge and experience with the type of deals you’re discussing, is paramount, but boards also must ensure their advisors aren’t blindly loyal to management.
Arlen Shenkman: Flawed deal-making often arises from the board and management not establishing a good process, which includes a thoughtful approach to independence issues. Getting good, strong, wholly independent advisors should be a first step for any board approaching a deal, especially in change-of-control or going-private transactions.
Betsy Atkins: Yes, I agree. Boards must make smart choices in picking advisors and in determining what situations require the board to have its own advisors. It’s important to understand the context of decision-making. For instance, I remember the sale of Lucent to Alcatel in 2006. Separate board advisors weren’t seen as necessary then–and that would never happen today. My advice: Always think ahead and ask the hard questions of management, counsel and bankers early in any process. I’ve seen too many cases where the board made bad choices.
Arlen Shenkman: It’s also important for the board to have a relationship with deal professionals, such as investment banks and M&A lawyers with industry expertise. Too often I see a board first meeting with its deal professionals in the heat of a deal, and those professionals don’t understand the workings of the particular industry, company or board.
Betsy Atkins: Agreed. In the technology industry, for example, you might have a banker who understands deals but who’s an expert only in software. If you’re acquiring a hardware company, it could be a total mismatch. Let’s say a company is selling to Cisco. You want someone who has done a few deals with Cisco. Go with a banker who has done deals with the company you’re targeting, so you’ll know what terms they’ll accept. Boards also need to look more closely at why management selects particular advisors. Do those advisors have a deep relationship with management? Are they wired in to the demands of a particular deal? How did the advisor actually come to the board? Is he or she really representing management?
Arlen Shenkman: There are very real consequences for the manner and quality of a sale. For instance, when we look at acquisitions at SAP, one factor is how well the target company’s board manages the review process. It’s important to ensure a clean process, and SAP wants to know the deal has been approved by independent, noninterested directors. Generally, once the deal closes, any liabilities become the acquirer’s. Because of the nature of transactions, I believe that most companies and boards are better at doing acquisitions than at being acquired themselves.
Betsy Atkins: That’s a very important point, and one too few boards are willing to face. I’ve read that something like 40% of corporations won’t be around in their current form 20 years from now, but boards do too little to build potential exit strategies into their long-term thinking.
Arlen Shenkman: Good point. Smart boards do lots of contingency planning, but often they aren’t doing enough to focus on really big structural issues. That includes considering and reviewing opportunities to sell the company. Succession planning by the board isn’t just for CEO succession–the board needs to consider the succession of the company itself.