M&A as an ultimate test of governance.

• Author: Davidson, Mike
• Position: Mergers and acquisitions

There are few events where boards can add more value than in advising management through all stages of a merger.

Handling mergers and acquisitions from their inception through their long-term performance now looms as the ultimate test of the modern board of directors. Why the ultimate test? Because there is no other transaction so often undertaken to create value and no other event with more potential for destroying it. Why the modern board? Because boards today are being held to a much higher and more public standard of performance than ever before.

Despite some highly successful mergers, value has certainly suffered. In fact, research on mergers completed in the first five years of this decade indicates that 83% of large, public mergers actually destroyed value or created only marginal returns (Business Week, October 30, 1995). Nevertheless, the number of companies involved in mergers and acquisitions set records in the 1980s, reached a cyclical peak in 1995, and seems set to stay strong for the foreseeable future. So directors should certainly expect that at some time during their tenure they are likely to be put to the ultimate test of overseeing a merger or acquisition.

Directors can also expect to be held increasingly accountable for the success or failure of a merger or acquisition. Following the massive destruction of value that took place in the past 15 years, many stakeholders in corporations began to ask a simple question: Where were the directors during this disaster? Meanwhile, best practices in corporate governance, including the responsibilities and activities of directors, were articulated and promulgated. Shareholders now increasingly expect boards to actively oversee the activities that crucially determine the organization's short- and long-term performance.

Boards can no longer meet their obligations during a merger or acquisition solely by relying on management's judgment or by garnering a "fairness opinion" from independent sources such as investment banks. At every stage of a proposed merger or acquisition, management needs - and deserves - real coaching, based on the greater experience that board members can often provide. Most managers are involved in few deals during their careers. Board members with merger or acquisition experience can therefore vastly increase the credible body of relevant experience because the most difficult, most significant value-destroying or value-creating factors for an organization are inherent in the transactions themselves, not the business or industry in which they take place. In fact, such experience and involvement by the board can be the critical difference in fully realizing the anticipated value that drove the transaction in the first place.

Such active involvement, far from being a "usurpation" of management's role, is merely a specific application of the board's responsibilities, as defined by such diverse bodies as the American Law Institute, the Business Roundtable, and the National Association of Corporate Directors (NACD). [See page 45.] The task for directors is how to translate such comprehensive responsibilities into a constructive framework for dealing with the intricacies of a merger or acquisition.

First, they should recognize that there are three distinct phases of a transaction - pre-deal, deal, and post-deal - and that each requires different approaches. This not only sharpens the focus of oversight on each phase but also, by focusing from the start on the post-deal phase, keeps in view the ultimate objective: the creation of long-term value. After all, it is only in the post-deal phase that real, lasting value is created. Therefore, it is the vision of how the new entity will look after the deal, and the practical challenges involved in turning that vision into reality, that should govern behavior during the pre-deal and deal phases. That means undertaking the deal from the very beginning with a plan for post-merger integration clearly in view. Although a bad deal can't be saved by a good post-merger integration plan, a good deal won't work without one. Thus, failure to begin with integration in mind from the start is a sure recipe for disaster - and one that a vigilant board should certainly avoid.

Second, directors can identify the key drivers within each of the three phases of the transaction and manage them across the three dimensions of major change - the rational, the emotional, and the political. During each phase, different dimensions of change will dominate. Directors, guided by a vision of the post-deal integration, can make sure that the right dimensions of change, in the right proportions, dominate at the right time. And thus they can most effectively bring their general responsibilities to bear on the specific situation of the merger or...