What directors are thinking.

Position:BOARD BOOK: Top of Mind

ROY DUNBAR, DIRECTOR: Humana Inc., Johnson Controls PLC, and SiteOne Landscape Supply

We are in interesting times where M&A activity is favored by a rare combination of factors.

These include companies having attractive currency both in cash and value of their stock; windfall earnings from the 2017 Tax Cut and Jobs Act; equities are historically highly valued; and debt markets are supportive of acquisitions that make financial sense at relatively modest interest rates.

As directors contemplate offers their companies might make or may be incoming from prospective acquirers, there are a few things that may occupy the mind beyond such factors as the Revlon Rule which requires that boards seek the highest acquisition offer for shareholders.

When a target of a takeover attempt or structuring an offer with the prospective acquirer, four factors (equity cash mix, deal certainty, employee engagement, and actions if the deal fails) are at play. They may be simple to think of, but complex to deal with as time is a key unknown that creates ambiguity and considerable risk.

A director needs to gain a firm understanding of the time-risk in each permutation of offer being made and assure that any resultant merger agreement is structured in a manner to minimize the risk to their fiduciary entity.

The biggest medium-term risks relate to critical employees. Key employees are usually the most valuable, the most sought after by competitors, and the fastest ones to find alternative employment. The tools management can deploy to address this risk are an abundance of clear communication, a cash and equity pool to incentivize top talent to stay through the process, and a merger agreement that allows the latter and for the target company to adjust operational plans to market threats and opportunities

Roy Dunbar has been CEO and Chairman of Network Solutions; President of Technology and Operations at MasterCard; and Chief Information Officer at Eli Lilly. Dunbar was named to National Association of Corporate Directors' "Directorship 100" in 2015.


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