Modernize Your Board’s Role in M&A and Achieve the Greatest Deals

Editor's Note: Take a look at our featured best practice, M&A Sell-Side Process Letter - Phase I and Phase II (5-page Word document). What is the M&A process letter? The M&A process letter is a template or example which assists transaction advisory consultants, investment bankers, and M&A practitioners with a sound basis from which to outline the proposed transaction steps in an M&A process. As the M&A process progresses [read more]

Also, if you are interested in becoming an expert on Post-merger Integration (PMI), take a look at Flevy's Post-merger Integration (PMI) Frameworks offering here. This is a curated collection of best practice frameworks based on the thought leadership of leading consulting firms, academics, and recognized subject matter experts. By learning and applying these concepts, you can you stay ahead of the curve. Full details here.

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Many large corporations depend on M&A for growth and executives can boost the value that deals create. But poorly executed M&A can saddle investors with weak returns on capital for details. In fact, the margin between success and failure is slim.

Many Boards are reluctant to cross the line between governance and management. The level of engagement is often outside the comfort zone for some executives and directors. As such, they miss opportunities to help senior executives win at M&A.

There is a need to modernize the Board’s role in M&A. Modernizing the role of the Board in M&A can result in the alignment of the Board and management on the need for bolder transactions with more upside potential. Further, this is essential in achieving a competitive advantage.

The 3 Core Opportunities in M&A

There are 3 core opportunities for the Board to play an impactful role in M&A.

1. Potential for Value Creation. The first core opportunity, potential for Value Creation enables the Board to challenge the executive’s thinking on potential transactions. This is an opportunity for the Board to maintain constant touch with the company’s M&A strategy, the pipeline of potential targets, and emerging deals.

2. PMI Plans. This is an essential core opportunity that enables the Board to boost value creation to as much as 2-3x the net value. Post-merger Integration (PMI) Plans representat an opportunity to pressure test against stretch growth and cost goals before and after a deal. Greater variation in the quality of post-merger plans exist compared to financial analysis and pricing of transactions.

3. Competitive Advantage in M&A. Competitive Advantage is a core opportunity that is unrelated to a transaction’s deadline. This is an opportunity to create a competitive advantage through M&A skills. These are corporate assets that can be difficult to copy. Making that decision to create a competitive advantage through M&A can lead to bolder decisions with more upside results.

The 3 core opportunities can promote greater Board engagement. When this happens, discrete deals can be converted into ongoing deal processes and dialogues that can deliver greater value from M&A.

Maximizing Core Opportunities to Attain the Greatest Deal

The potential of the 3 Core Opportunities to embolden the role of the Board in M&A is great. Organizations just need to have a good understanding of each core opportunity and the underlying key areas or dimensions of each key area. Let us take a look at the 1st Core Opportunity: Potential for Value Creation.

The Potential for Value Creation has 3 critical key areas that can challenge that lead opportunistic transaction to succeed. One critical key area is Strategic Fit.

Strategic Fit is key to determining why a company is a better owner than competing buyers. Deals driven by strategy succeed more often when they are part of a stream of similar transactions that support that strategy. This is a key element in Strategy Development.

How can we enhance the role of the Board relative to this key area? The Board can play a vital role in clarifying the relationship between a potential transaction and strategic planning. They are also in the best position to define how the deal will support organic-growth efforts in target markets and provide complementary sources of value creation.

The other key areas under the Potential for Value Creation are Financial Statements and Risks vs. Rewards. The Financial Statements is a key area that can correct the Board’s tendency to put emphasis on price-to-earnings multiples which can be limiting. The Risks vs. Rewards, on the other hand, is a key area that challenges the Board to acknowledge uncertainties in pro forma.

The other 2 Core Opportunities also have their own essential points or dimensions the Board must focus on. Only then can these core opportunities be of the maximum potential of modernizing the Board’s role in M&A and gaining the greatest value.

Interested in gaining more understanding of achieving Board Excellence through M&A? You can learn more and download an editable PowerPoint about Board Excellence: M&A here on the Flevy documents marketplace.

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M&A is an extremely common strategy for growth. M&A transactions always look great on paper. This is why the buyer typically pays a 10-35% premium over the of the target company's market value.

However, when it comes time for the Post-merger Integration (PMI), are we really able to capture the expected value? Studies show only 20% of organizations capture projected revenue synergies and only 40% capture cost synergies. Not to mention, the PMI process is typically very painful, drawn out, and politically charged, often resulting in the loss of key personnel.

Learn about our Post-merger Integration (PMI) Best Practice Frameworks here.