In an era of shareholder activism, possible proxy fights, and replacing an entire slate of board nominees, directors are evaluating the deals with more diligence than a decade ago. Costly litigation has also risen against the U.S. & European Non-Executive directors on both sides of the Atlantic Ocean.
Growth in Global M&A Transactions
Global data released by the Economist in late June informs that M&A activity has increased to the levels last seen back in 2007. Deals already announced this year have amounted to $1.7 Trillion.
Global M&A Growth Strategies
Global Boards can improve their competitive position in key markets, gain distribution channels, and gain access to new technology and resources through M & M&A transactions. they can achieve diversification strategies. Boards face challenges of merging or being a friendly or hostile acquisition target.
I encourage board chairs seeking growth through diversification strategies to make sure that M&A discussions are regularly scheduled with management at board meetings and the annual retreats with top executives of the company.
Management Must Provide the Correct InformationBetsy_S_Atkins
When reviewing Global deals, board members need to receive a different set of Metrics from management to perform their fiduciary duties. I checked with Betsy Atkins for her views sitting on multiple U.S. & Global boards; Darden Restaurants, Schneider Electric, Polycom, Chairman of SAP North American advisory board & a former NASDAQ board member. “Evaluating merger-and-acquisition opportunities can be the highest stakes role a board plays and the most frustrating. Decisions reached today are second-guessed for years to come. And often, no matter how diligently the board acts, there is an information mismatch between what the board needs to know to make the best decisions and what it can get from management and other sources. We get telephone books’ worth of information when what we need are a few key facts;
- Like how fast and how well the company can integrate the company
- What unique benefit will we gain (technology, intellectual property, key people, Access to a certain market?) And concise basic financial information.”
Atkins recommends that the above information be provided to the boards in summary to evaluate the proposed deal.
Top Five Strategy Considerations for Boards
1) Economic, Political and Reputational Risks of the Market
Boards should discuss with management the economics, politics, and openness of local governments to foreign companies owning important local companies. Japan has been slow in letting foreign M&A deals occur. Similar issues have arisen recently in France, and the U.K. should consider the government structure and market maturity.
Some foreign governments are trying to attract foreign capital and investments by privatizing many state-owned entities. Mexico and Kazakhstan are some examples. Money spent filing fees with listing and delisting it can waste the stock.
- What is the likelihood the local government will approve the deal?
- How long before we see a return in the country’s current economic & political situation?
2) Equity Ownership – Security Regulator Laws
American & Global Chairman needs to question management around stock ownership rules and deal flow requirements. Stocks ownership by Board members themselves varies by country. Many Chinese firms are quasi-government-owned. Structuring a majority stake ownership may not be allowed by US SEC and local Chinese regulators. In the United States, if Independent board members don’t own stock of the company they are serving, their interests are not with the firm.
- How much stock can be owned by board members under the country’s rules?
- How do we compensate top executives in the new country?
Compensation Committee members need to understand Compensation Models for the new CEO & top management vary from the U.S. to Europe. Many Asian & African country executives expect non-financial instruments as incentives.
3) Buy-Side
Institutional investors are the largest owners of stock purchasers for most public companies. This group of silent proxy voters is now becoming more active in the company’s affairs. In March of this year, Larry Fink, BlackRock’s CEO, the largest global institutional investor with $4.32 Trillion AUM, sent his client CEO & Chairman a letter to focus on companies’ long-term growth. Institutional investors view many countries as turnaround economies and upcoming emerging markets. They would like management to gain market share in places where they invest. Turkey is an example in Europe.
Does this mean the board has to do what institutional investors want? No! However, in an era of shareholder activism, engaging your largest institutional investors about their opinions does make business sense. Being active is better than at proxy season trying to gather feedback and mend any sour feeling of fallen stock prices and lack of earnings
- How will our largest shareholders view the deal?
4) Increased Compliance Complexity
Audit Committee members of U.S. publicly listed companies have to understand that they will be signing on the new companies internal controls under Sarbanes Oxley Act & reporting under Dodd-Frank rules on Whistle Blower & Conflict Minerals.
Depending on the continent and country, different local & Global laws will be automatically triggered upon completion of the deal. Manufacturing & Healthcare companies doing business globally, quality ISO standards may add additional compliance requirements. There are additional compliance issues that are very visible and impact reputational risk.
- Bribery to foreign officials for obtaining business under US FCPA and U.K. Bribery
- Stricter Data and Privacy Standards in Europe, especially in France
- Poor quality standards in manufacturing by Chinese and Indian vendors
Tim Cook, the Apple CEO, had to get involved when Chinese vendor employees started committing mass suicides. It affected Apple & Nike stock price when the quality of life and sweatshops using Chinese workers surfaced in the media.
- What are the major key risks of the business we will inherit?
- What are the risks they are not telling us / why?
5) Tax Considerations
Recently Pfizer, a major pharmaceutical U.S. corporation, wanted to merge with U.K. AstraZeneca (AZ) in a deal worth 70 Billion British Pounds ($118 Billion U.S. Dollars) to minimize taxes. The deal never occurred as AZ’s board repeatedly rejected it. It has initiated U.S. political discussions about closing tax loopholes. “Under U.K. rules, Pfizer cannot make another offer for six months unless a third-party bidder were to arise or AZ board restarted talks, Analysts at BNP said “that a sweetened offer equal to about 75 billion pounds (about $127.7 Billion U.S.) would still make “economic sense..”
The Cayman Islands and Ireland are examples of low-tax countries. The use of non-repatriated cash is one consideration the board needs to discuss with management.
- How much tax are we saving with the deal?
- What will impact our reputation and relationship with our national government?
Post-M&A
Directors need to question management on the success of previous M&A. Betsy Atkins calls this the “After-the-acquisition issues and integration challenges.” “Can you show me a brief timeline of the merger integration, showing key milestones and expected problems?”
What Should Top Management Do
Atkins suggests an “update a board on experiences with past acquisitions – I like to see a good forensic examination of previous deals.
- What worked? What didn’t? Why?
- Were the key numbers or goals met?
- Best of all, what lessons did we learn that will make the current deal better?”
In Conclusion
This is not the list of considerations that global Chairmen & boards need to discuss when doing a global deal. Global M&A has increased, and board members need to educate themselves for such corporate governance challenges. In the U.S., the fiduciary responsibilities of care and loyalty to shareholders will be how the doctors will judge the director’s reputation through the test of times. CEOs and Chairman need to make sure M&A is regularly discussed in the boardroom meetings.
GBAC would be glad to guide you through our customized Signature Boardroom education program at your next off-site annual retreat with senior management or directly in your boardroom. We bring insights from Global Boardrooms for enhancing boardroom excellence.
Sources-
Bank Analysts Say Pfizer-AstraZeneca Merger Still Makes Sense 06 24 2014 DealBook NY Times
http://dealbook.nytimes.com/2014/06/24/bank-analysts-say-pfizer-astrazeneca-merger-still-makes-sense
The Economist 06 26 2014 “Mergers and Acquisitions” viewed online June 28th, 2014
How Boards should deal with M&A, Forbes 2010
http://www.forbes.com/2010/01/05/mergers-acquisitions-boards-leadership-governance-directors.html
