|
|
 |
|
| Best Practices: On the Board |
The Sum of the Parts
Suzanne McGee
07/01/2005
|
Indeed, very few
deals can be considered winners. Many studies have found that a majority of
deals fail to generate significant benefits. Warren Batts, a veteran Chicago
businessman whose 15 public-company directorships have included seats on the
boards of Allstate and Sears, calculates that he has participated in perhaps
four dozen acquisitions. He figures that even the company with the best
acquisitions track record did well only half the time.
Independent directors
must separate promising M&A opportunities from poor ones as early in the
process as possible, without jeopardizing the board’s working relationship with
the C-level officers. “These are the people who have to use their independence
and their best business judgment to evaluate the opportunities that are brought
to them,” says Alan I. Annex, chairman of the corporate and securities group at
the New York office of Greenberg Traurig, a national law firm.
TOP VIEW
Directors see their primary role during a merger or acquisition as overseeing financial negotiations. But they often overlook other issues that can be just as
crucial to successful assimilation: ensuring that mergers or acquisitions fit
into a company’s strategy and management hierarchy and that the two companies’
cultures are compatible. |
If this
relationship sours, a director may follow in the wake of Walter Hewlett, son of
one of the founding members of Hewlett-Packard, and a main character in one of
the nastiest takeover battles in recent memory. In the summer of 2001, Hewlett,
a director of Hewlett-Packard, voiced concerns about Fiorina’s plan to combine
with Compaq Computer for $22 billion. He argued that such a merger held great
risks and that forming a larger company was not necessarily the best way for the
two technology companies to battle rivals such as Dell and IBM. People familiar
with the boardroom battle say Hewlett felt steamrollered by the powerful
personalities on the board. Reluctantly, he cast his vote in favor of the deal
in September 2001, only to reverse course two months later and help organize a
battle to prevent shareholders of Hewlett-Packard from approving the deal. He
lost, and the deal was completed the following spring, by which time Hewlett had
been dropped from the company’s board. When Hewlett-Packard’s board ousted
Fiorina early this year after the synergies she promised failed to materialize,
industry analysts and investors were starting to believe that Hewlett’s
criticism had been on the mark.
“None of us wants to follow in Walter’s
footsteps,” says one veteran Silicon Valley investor who sits on a number of
corporate boards. “It’s the ultimate nightmare: objecting to a deal too late, in
the wrong way; failing in your public efforts, and then being proved right way
too late in the day.”
| “If the people coming on board, who are responsible for integrating
the company, aren’t a good fit, then you can’t go ahead.” |
To avoid this, veteran directors say boards must be
structured properly before the CEO ever brings a deal to the table. The
independent directors should include business executives who have experience in
negotiating transactions and overseeing businesses post-merger, with knowledge
and status enough to ensure that any critique they make of a proposed deal will
be heard respectfully by a CEO. But the board should not be dominated by
dealmakers. “You end up feeling like you’re in a high school locker room, with
everyone egging on everyone else to do the acquisition, and you’ll end up in
trouble,” the Silicon Valley director says.
The board then needs to set clear
ground rules by helping management determine what kinds of deals, both in size
and type, fit into the company’s overall business strategy. “We can’t wait until
a CEO is burning with enthusiasm for a deal in the boardroom, and then try and
pour cold water on his brilliant idea—it’s going to be ineffective,” maintains
Charles Elson, head of the governance center at the University of
Delaware.
More conservative boardroom veterans prefer smaller deals that are
easier to execute and digest than large transactions. Others express a
preference for proposals that are developed organically inside the company
rather than those that are brought to the CEO’s attention by an investment bank.
Most directors are wary of deals that seem to be defensive in nature. “It’s
usually a mistake for companies to say, ‘If we just buy this company, we will
solve our slump in sales in one step,’” says Ron Langford, London-based managing
director of Marakon Associates, a consulting firm. “If your base business isn’t
performing effectively odds are not great that you are going to acquire
someone else and integrate them.”
|
|
|
|
|
|
|
