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.”

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.com

Illustration by Kevin Spaulding.