CEO's Blog

Top Five Global M&A Growth Strategies for Boards

In an era of shareholder activism, possible proxy fights and replacement of entire slate of board nominees, directors are evaluating the deals with more diligence than a decade ago. Costly litigation has also risen against US & European Non-Executive directors on both sides of the Atlantic Ocean.

Growth in Global M&A Transactions

Global data released by the Economist 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.

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Global M&A Growth Strategies

Global Boards can improve competitive position in key markets, gain channels of distribution, gain access to new technology and resources through M&A transactions. Diversification strategies can be achieved. Boards face challenges of merging or being a target of a friendly or hostile acquisition.

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

Betsy_S_Atkins-150x150[1]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 US & Global boards; Darden Resturants, Schneider Electric, Polycom, Chairman of SAP North American advisory board & a former NASDAQ board member. “Evaluating merger-and acquisition opportunities can be the most high stakes role a board play – and also 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 actually get from management and other sources. We get telephone books’ worth of information when what we really need are a few key facts;

  • Like how fast and how well the company can be integrated
  • What unique benefit we will gain (technology, intellectual property, key people, Access to a certain market?) And concise basic financial information.”

Atkins recommends the above information be provided to the boards in short summary so they can 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. The government structure and market maturity should be considered.

Some foreign governments are trying to attract foreign capital and investments by privatizing many state owned entities. Mexico and Kazakhstan are some of the examples. Money spent filing fees with listing and delisting of the stock can be wasted.

  • What is the likelihood the deal will be approved by the local government?
  • How long before we see a return in the current economic & political situation of the country?

2) Equity Ownership – Security Regulator Laws
American & Global Chairman need to question management around rules of stock ownership 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 both US SEC and local Chinese regulators. In United States, if Independent board members don’t own stock of the company they are serving, it is considered there interests are not with the firm.

  • How much stock can be owned by board members under the rules of the country?
  • How do we compensate top executives in the new country?

Compensation Committee members need to understand Compensation Models for the new CEO & top management varies from the US in Europe. Many Asian & African countries executives expect non-financial instruments as incentives.

3) Buy-Side
Institutional investors are the largest owners of stock purchasers for majority of public companies. This group of silent proxy voters are 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’s & Chairman a letter to focus on the long-term growth of companies. 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 US public 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 UK Bribery
  • Stricter Data and Privacy Standards in Europe, especially in France
  • Poor Quality standards in manufacturing by Chinese and Indian vendors

Tim Cook Apple CEO had to get involved when Chinese vendor employees started committing mass suicides. This 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 US corporation, wanted to merge with UK AstraZeneca (AZ), in a deal worth 70 Billion British Pounds ($118 Billion US Dollars) to minimize taxes. The deal never occurred as AZ’s board repeatedly rejected it. This has initiated US political discussions about closing tax loopholes. “Under UK 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 US) would still make “economic sense..”
The Cayman Islands and Ireland are examples of low tax countries. The use of non-repatriated cash are some of the considerations the board needs to discuss with management.

  • How much tax are we saving with the deal?
  • What will be the impact on 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 call 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

photo-in-acquisition-mode[1]This is not the entire 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 US, the fiduciary responsibilities of care and loyalty to shareholders will be how the director’s reputation will be judged through the test of times. CEO’s 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/?_php=true&_type=blogs&_r=0

The Economist 06 26 2014 “Mergers and Acquisitions” viewed online June 28th 2014

http://www.economist.com/news/economic-and-financial-indicators/21605940-global-mergers-and-acquistions?fsrc=scn/tw_ec/global_mergers_and_acquistions

How Boards should deal with M&A, Forbes 2010

http://www.forbes.com/2010/01/05/mergers-acquisitions-boards-leadership-governance-directors.html

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