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| Best Practices: On the Board |
The Sum of the Parts
Suzanne McGee
07/01/2005
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Above all, directors should make it clear
that a CEO’s proposal to bid for another company or to pursue a merger should
not come as a surprise to them. While a specific opportunity may suddenly
emerge, it should be immediately clear to everyone how that proposed deal fits
into the commonly understood corporate strategy. “Board members have an
obligation to warn management at an early date not to devote time and energy to
a deal that the board is likely to reject,” says Stephen Fraidin, a partner at
Kirkland & Ellis.
Ounce of Prevention
Taking time for detailed discussions, both formal and
informal, helps identify risks that a particular deal may not be the right one
to pursue. Studying the proposed deal that he helped avert at GVI Security,
Safir says he found “personality issues that I think would have ended up hurting
us. If the people coming on board, who are responsible for integrating the
company, aren’t a good fit, then you can’t go ahead.” Safir spoke privately to
the CEO about his concerns, and the deal was never presented to the full board
for a vote.
Pressing forward too rapidly with a deal also increases the
ever-present risk that the firm will overpay for an acquisition. “If you look at
the deals that went sour in the technology and telecom arena, a lot of the
problem was that people felt pressured to do deals very quickly in a torrid
market,” says Gabriel Lowy, an analyst at Blaylock & Partners. “Valuations
for many of these acquisitions got way out of proportion.”
Once a deal is
completed, the integration of the two companies often proves the longest and
most perilous task, according to directors and advisors who have undergone or
studied the process. However, this is a subject on which directors can advise,
but should not take a leading role. While a board is obligated to examine how
well two companies will coalesce before they are merged, the tactical vagaries
of avoiding a culture clash between two newly wedded organizations falls on
corporate management, not the directors. “There is a fine line to walk between
being a good director and stepping over the line and second-guessing
management,” Safir says. “If you don’t trust management to manage a company once
it’s acquired, well, why do you still have that team at the top?” Board members
can reduce the odds of a civil war, however, by talking with senior managers at
the two companies and ascertaining the likelihood of them being able to work
well together following the merger.
Sometimes that means ensuring that
management takes a hands-off approach to a newly acquired division. When shoe
manufacturer Wolverine Worldwide obtained a tiny company that made hiking shoes
a few years ago from a financial conglomerate, directors decided that the right
way for management to handle the deal was to let the two founders of the target
company run it as they saw fit.
“We felt that the previous owners, who didn’t
understand the shoe business, might have stifled them,” says Elizabeth Sanders,
a veteran independent director. The decision has paid off, she says. “It turns
out that we bought genius as well as a good product. Sales have exploded, and
the Merrell shoes are now sold in 120 countries. As directors, it turned out
that all we had to do was remind two rather self-effacing people of what was
possible, and remind our CEO of the potential behind the product,” Sanders
marvels. “Everything fell into place.”
Suzanne McGee writes about financial markets and corporate finance,
philanthropy, corporate governance and art. suzanne.mcgee@gmail.comIllustration by Kevin Spaulding.
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