The PMI board pack: New diligence in M & A.

• Author: SIROWER, MARK L.
• Position: Mergers and acquisition

How can a board help protect shareholders from post-merger integrations gone awry? By demanding that there be a board pack detailing a credible and accountable PMI plan. Here is what directors should look for in that board pack.

WELCOME TO the most important period of mergers and acquisitions in industrial history. For many successful companies such as GE, Tyco, and Citigroup, M&A is a critical component of their corporate growth agendas. Unfortunately, it is now well accepted that roughly 65% of transactions fail to deliver on the promises CEOs make to their shareholders, and many of those are outright disasters. And the results seem to be getting even worse as we get deeper into the current merger wave. Can boards help improve the odds of success? We believe the answer is yes.

To do this, directors need more and better information about proposed deals before they cast their votes. In recent years, significant advances have been made around understanding up-front strategy and pricing issues in acquisitions and the resulting stock market reactions to deal announcements (see sidebar, "Why the Market Needs Answers"). Indeed, no longer would any board worth its salt rely merely on an investment banker's fairness opinion to justify the payment of a significant acquisition premium.

Yet while boards have become much better at pressure testing the economic rationale and synergy claims given to them by the CEO, board packages on proposed deals seldom contain any real information on how a deal will actually be integrated. What's more, the recent mantra of many post-merger integration (PMI) "experts" to "move decisively in the first hundred days," pay attention to culture," and "communicate-communicate-communicate" offer little tangible advice to directors who are attempting to act prudently before approving what hopefully are value-creating acquisition decisions.

As Chairman Weill says...

In this article we build the case for a PMI "board pack" that should be demanded by boards so that they can exercise their fiduciary duty of care to their shareholders. As Citigroup Chairman and CEO Sanford Weill recently commented, "Mergers fail because the people who do them are not really on top of the details...It's like putting an engine in a car. If you don't connect it right, the car is not going to move" This is precisely what worries investors when deals are announced: Can the acquirer actually deliver on its promises? Initial market reactions -- positive or negative -- are now known to be indicative of deal success or failure as measured by long-term shareholder returns. Because that initial market reaction will set a tone for what the organization will have to live with for years to come, it is vital for senior management to bring a credible story to the market.

Directors must feel confident that the claims of management are supported by a specific plan before approving a deal. While the role of culture in PMI has received tremendous attention for years, it is our experience that when the key up-front PMI issues are ignored or mismanaged, it is easy -- and often incorrect -- to blame "culture" for almost everything that goes wrong. The right PMI process and structure will motivate timely senior management decisions, stabilize the businesses, reduce employee uncertainty, drive collaboration and quick wins, set targets, and establish a tracking mechanism that recognizes the promises the company has made to investors (see sidebar, "Why Require a PMI Board Pack?").

Our board pack should especially help boards avoid the scenario, so often played out in poorly planned acquisitions, in which directors tell the CEO, "You mean you didn't think about these issues before you started slamming the two companies together?" Unfortunately, by that time the directors can no longer protect their shareholders.

Five elements of the PMI board pack

The board is in a unique position to ensure not only that a proposed transaction makes sense strategically and financially but that the groundwork has been laid to deliver the promised results. By making specific demands of senior management, directors can have a tremendous influence on the outcome. Before a deal is approved by the board and announced publicly, the following five key elements must be detailed:

1. PMI process calendar showing phasing of activities and decisions.

2. Key top-level shaping decisions to he made up front.

3. Tailored integration approach that is clearly articulated.

4. Structure, teams and resourcing to deliver the PMI.

5. Business plan that delivers the performance promises for the deal.

1. PMI process calendar and phasing of activities

   A successful PMI does not begin or get done in the first hundred days after closing. It is a structured series of events that begins long before and continues long after the deal closes. The board should have a good view of the phasing of these activities along with a timetable of what is to follow. In recent disastrous transactions, such as Conseco/Green Tree and Mattel/Learning Co., the CEOs have stated for the record that there was little in the way of PMI planning. The respective boards could have easily seen the problems that were to come. In fact, by the time directors even consider an M&A proposal, the PMI process should already be well underway.

   The exhibit below is an outline of key phases and activities. These four phases, from up-front planning through implementation, run sequentially but may be advanced or extended.

   The up-front planning and direction-setting phase begins around the same time management is conducting due diligence and valuation work. In hostile transactions, this phase will have to be completed only with publicly available information on the target. During this phase, senior management...