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| Best Practices: On the Board |
The Sum of the Parts
Suzanne McGee
07/01/2005
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It is a long way from running the New York City Police Department to chairing
a corporate board. But Howard Safir, former NYPD commissioner, is finding his
ability to get answers to tough questions and to launch in-depth investigations
useful in his new role as an independent director and chairman of a newly public
firm with an appetite for acquisitions.
“I actually stopped one purchase that
didn’t feel like a good deal,” says Safir, chairman of GVI Security Solutions, a
video surveillance and security company. “Sure, the numbers looked great, but we
all know there is more to doing a good deal than the numbers.”
 Certainly, a
merger will rarely move beyond the due diligence stage if the numbers do not add
up—if a target company’s revenue stream falls short of expectations or the buyer
is asked to assume too much debt, for example. But a deal’s fundamentals—first
and foremost, the right price—are only one concern for board members when the
CEO asks for their stamp of approval on a proposed deal.
Mergers are again on
the increase. The dollar value of proposed and completed mergers and
acquisitions has soared so far this year. As of May 3, $363.5 billion in U.S.
deals had been announced, a 23.2 percent gain over the same period in 2004.
Worldwide, deal volume hit $794.9 billion, up from $629.4 billion in 2004,
according to data from Thomson Financial.
In this heated deal environment,
directors need to determine whether acquisition or merger opportunities fit not
only into a company’s books, but also its overall strategy and corporate
culture. Over the long term, integrating the two companies’ operations—and their
boards—with minimal disruption will prove as important to a transaction’s
success as its price, terms and conditions. The cost of failure can be
monumental, as Carly Fiorina and Steve Case can attest.
“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.” |
Cautious
Contrarians
Participating in a boardroom decision on a merger or an
acquisition proposal is always a diplomatic balancing act. Board members cannot
conduct the day-to-day operations of a company, but they must insist on frequent
and candid updates from executives during the due diligence phase of any
transaction. Directors must ensure that company managers avoid getting caught up
in the exhilaration and anticipation of an M&A deal and remain focused on
how the two organizations can best unite organizationally and
operationally.
Acquiring—or being acquired—is a very public business
experiment, says Duke K. Bristow, an economist at the UCLA Anderson School of
Management. Board members can argue over executive compensation behind closed
doors, but a merger or acquisition fails in full view of shareholders. The
opportunity for growth is generally worth the additional scrutiny;
acquisition-minded companies generally perform better over time. “There are
studies that show that many companies that are acquisitive have longer-term
shareholder returns that are better than those that don’t acquire at all,”
Bristow says, even if not all of those deals are winners.
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