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| M&A
Policy: A Board Responsibility |
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M&A
Policy:
A Board Responsibility
Directors
Monthly The official Newsletter of the National Association of Corporate
Directors
Vol. 22, No 7
July 1998
By Diane C. Harris
President
Hypotenuse Enterprises, Inc.
Rochester, New York
Does your company have a
policy for mergers and acquisitions? This article can be a blueprint for
setting one.
In a
survey we did of Fortune 300 companies, we asked the question, “Is there
a formal acquisition policy in your company?" Nearly half of the
respondents said no—a rather shocking number, when you consider the
widely cited statistics that only one deal in five lives up to or exceeds
original expectations.
In
times of crisis, such as an unsolicited takeover offer, or the pressure of
a seemingly attractive property in a short-fuse auction situation, it is
just too late to develop the policies and controls that should have been
enacted earlier. It is the board of directors’ responsibility to see
that appropriate policies and controls are in place before a bear hug
occurs, before shark repellent is needed, before poison pills are
swallowed. And the dealmaking policies should not only encompass the
obvious areas of mergers, acquisitions and divestitures, but also
licensing, joint ventures, and other external growth structures
(collectively “corporate development policy” or CDP).
Each
board member should ensure that CDP is adequate and on balance, to
protect shareholder value, the rights of all constituencies, and the
viability of the corporation.
There
are three major areas for CDP focus: board prerogatives, clarification of
management responsibilities (including organizational process, procedures,
and methods), and controls.
Board Prerogatives
Board
prerogatives are those decisions and rights the board chooses to reserve
to itself, usually some or all of the following:
 | Strategic plan approval.
Most boards require a presentation by management on the strategic plan
and approval by the board. The strategic plan is then a driver for all
subsequent mergers, acquisitions, and divestitures activities. Usually
external growth strategies should be consistent with the strategic
plan and any inconsistent activities should be first elevated for
board approval. |
| Deal size hurdles. Most
board policies specify a transaction level or size, e.g., a dollar
amount, at which the board wants to review and approve. Some boards
require that any use of company stock also come for approval.
Generally, the larger the company, the higher the level of
transaction before it goes to the board. We have seen policy levels as
low as zero or as high as $20 million. |
| Sale of company assets.
Many boards are relatively lenient about M&A fishing expeditions
by management, but may be very restrictive on allowing management to
explore the sale of any company assets without the board’s approval.
One client company has a policy that calls for dismissal of anyone who
discusses the sale of company assets without having first received the
board’s approval. Sometimes such policies are qualified as only
applying to the sale of five percent or more of the company. Such a
policy reduces a company’s risk that a discussion with another
company might result in a negative impact to one of its own
businesses, or might attract an unwanted offer on the whole company. |
| Reporting of inquiries.
The policy prohibition against selling assets is often complemented by
a policy requiring that all inquiries concerning significant
transactions (including potential divestitures) be reported promptly
to the board of directors. A board with this policy is unlikely to be
surprised by an unwanted offer. Also, keeping a file of detailed
information on such inquiries provides a database of interested
parties for future divestitures. |
| Opinion letters. Many
boards decide case by case whether to require investment banking
valuation opinion letters before buying or selling an asset. Board
policy in some cases sets the level at which opinion letters will be
required, often around the $50 million mark for companies of about $1
billion in size. It is best practice for the board to decide, in
advance, the transaction size at which an opinion letter would be
required, perhaps adding the language that all management buyouts will
require a valuation opinion letter. |
| Takeover defense. Boards
also must decide what antitakeover protection will be put in place, if
any, such as staggered boards, poison pills, golden parachutes, or
change of incorporation. |
| Other. Some boards will
set other policies such as whether or not stock may be used in deals,
what are acceptable dilution ratios, which valuation methods will be
required, limits on investment banking fees, or requirements for
post-deal audits. Sometimes such details are found in detailed
procedures and methods. |
Responsibilities
Supplementing
the board prerogatives, management policies usually focus on three areas:
Organizational
policies must reflect the board policies, and clarify the
responsibilities of officers and other members of management. The CDP
will necessarily repeat the elements of board prerogatives in order to
ensure that employee’s actions are consistent with board policy
company-wide. For example, if management does not disseminate the policy
that says all unsolicited divestiture inquiries must he reported promptly
to the board, how will employees know to do so. Further, management may
want to set forth its own directives on how an employee should reply to an
unsolicited inquiry.
Additionally, management
policies should reflect the approval processes below board level. For
example, will there be an internal management or operating committee
to review all transactions, even those not submitted to the board? How
often will it meet? How will an employee post an item to the agenda?
Management
policies will cover such issues as:
| When should deviations from
strategy be elevated? To whom? |
| Who will be empowered to contact
prospective partners? |
| Who will negotiate, and will
there be a “qualified negotiator” concept? |
| Who will sign off on valuation? |
| Who will approve letters of
intent? |
| Who will approve investment
banking fees? |
| Who will sign contracts? |
| Who will approve deal
structuring? |
| Will there be an internal
champion system? |
| When will the board of
directors’ approvals be woven into the process? |
| How will submission be made to a
management committee, and at what stage of the deal? |
Policy and process must also
be reduced to procedures and methods, clarifying who will be
responsible for approving, administering, and changing the CDP. If
a company is expecting to do a number of transactions, either for
growth or restructuring, it needs process, procedures, and methods in
order to coordinate activities, ensure consistency, and to streamline
an otherwise “red tape” activity. Clarifying the process can help
dealmakers hone their skills and provide additional guidance and
training. Kinds of procedures include formats for presentation for
approvals/signoffs, valuation methods, due diligence checklists, and
formats for confidentiality agreements and fee agreements.
Controls
Having
a sound CDP in place is necessary, but not sufficient. Rules don’t
ensure compliance, controls do. The board can ensure the controls are in
place by doing most or all of the following:
| Ask to see all written policies
and procedures concerning development. |
| Insist on early postings from
management instead of waiting for a well-rehearsed final presentation.
The board should give early feedback and not wait until the train has
so much momentum that it can hardly be stopped. |
In reality, a board faced
with any crisis begins to deal with the issue long before the crisis,
when the decision was first made to have or not to have policies,
procedures, and controls in place.
| Use questioning designed to
bring out the strength or weakness of the underlying strategy system.
For example, one powerful question is “What alternative strategies
did you reject before making this recommendation?” If management
didn’t reject anything else, one has to wonder about the depth of
analysis. If management isn’t willing to talk about alternatives
rejected, one has to worry about the openness of management. Also, the
board should ask, “If this transaction is not approved, what will
you do?” further spotlighting weaknesses in strategic planning. |
| Require a champion for every deal, i.e., a member of top management who will stand up in front of
the board of directors and affirm, "I am responsible; I will get the
job done.” Personal responsibility is key to successful controls—
and to successful deals. |
| Use the post-deal audit—at
least at the six-month, one-year, and two-year points—to make sure
that results track commitment. |
In
reality, a board faced with any crisis begins to deal with the issue long
before the crisis, when the decision was first made to have or not to have
policies, procedures, and controls in place. It is much easier for a board
to prevent, or at least deal with such crisis in a company with a
well-thought-out CDP.
For
example, in an unsolicited takeover attempt, having appropriate policies,
procedures, and controls will help to determine:
| if a price is adequate, based on
a well-reviewed strategic plan and the company’s own valuation
methodology |
| whether all realistic
alternatives have been considered, drawing on the experience of many
presentations, of alternatives discussed, of understanding the
strategic options, and |
| whether the company should stay
independent, based on the company’s own growth opportunities,
strengths, management drive, and alternatives. |
Developing a CDP
Who
should lead the drive for adequate policy on mergers, acquisitions, and
divestitures? The survey we did of Fortune 300 companies with a CDP showed
that the corporate development department usually develops and administers
a CDP. The corporate development officer should lead the charge for a CDP,
but he or she need not write the policy. A neutral party can stay above
politicizing the process and can benchmark a wider industry base of
practice, thus allowing the corporate development officer to concentrate
more fully on executing the external growth strategies of the company.
Whether the CDP is written internally or outsourced, the corporate
development officer plays a key role in assisting the board to meet its
responsibilities in the M&A arena.
Diane
Harris is president of Hypotenuse Enterprises, Inc., an M&A advisory
and consulting firm she formed. Services provided by the Rochester New
York-based company include development of M&A policies for various
sized companies. Prior to forming her own company, she was vice president
of corporate development for more than a decade at Bausch & Lomb,
Inc., where she created and launched the company's mergers and
acquisitions program. Harris is a director of Flowserve Corporation and
president of the Association for Corporate Growth. This article is
reprinted from M&A Today (Vol. 6, No. 10, October l997, and based on a
speech delivered to the 1997 Corporate Directors’ Summit in Toronto last
September. |
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