Some meaningful tips on how to make the deals more meaningful for stakeholders
M Muneer/Ralph Ward
It seems to be the season for mergers and acquisitions as the pandemic has made the scene ripe for some and desperate for others. Zee, Sony, Adani, Wipro, Future, Reliance and many more are boarding the bandwagon. Continued low interest rates and innovative stock swapping fuelled a record number of M&A deals in the US during 2020-21, especially for over $5 billion megadeals. India has seen over $54 billion deals in M&A during 2020-21, albeit deals were below $5 billion.
When it comes to mergers and acquisitions, the past two years have proven that simplest of investment sayings – “No one knows anything.” The Covid turmoil was supposed to cripple weak companies and leave them ripe for takeovers. Others said no, companies of all sizes would be so stressed that they could not put time and resources into M&A. Real world trends took their own course.
What do corporate boards need to know in weighing mergers and acquisitions today (and going forward)?
Digital technology and capabilities went from a “Good Thing” in 2019 to a “Must Have” by 2021, and grabbing these tools motivated many new deals. Extremely rapid advancement in AI, data tools, online meetings, digital currencies, collaboration platforms, and so on mean companies need these capabilities now, but lack the internal resources and talents. So, rather than building your own, seeking an acquisition for a quick jump looks more promising as it will make the transition faster.
The value of M&A in technology area has more than doubled in 2020 from the previous year. The WFH movement sharpened focus on the tools needed to adapt, and that brought new ways to deploy technology in business. Enterprises looking for digital transformation have added these abilities as fast as they could. Boards can help by forecasting where tech trends might lead, and what target companies can help you jump the curve.
One of the biggest factors hitting M&A (and especially moving into 2022) is the growing governmental pushback on antitrust), business concentration, and taxes, plus inflation. People are expecting tax changes and an increase in capital gains taxes, so it is natural for them to try and push exits earlier than the budget time. Our advice to boards is to keep an eye on taxes and inflation, which are likely to spike given India’s higher fuel costs and taxes. Tax policies on foreign subsidiary earnings and repatriation of profits will be a major issue in 2022.
Antitrust and merger concerns are growing worldwide, particularly when it comes to tech concentration and cross-border acquisitions. Foreign direct investment rules are tightening in many countries, with China’s toughening policies on investments and pushing back on their private sector, adding uncertainty. In the U.S., there is a rapid, significant shift to increased enforcement of the antitrust laws by the Federal Trade Commission. The board should bring a clear-eyed, outside take on possible regulatory hurdles a planned deal may face even if this deflates sunny estimates by management.
There are other, newer issues facing M&A today that the board’s counsel can help with. Liability issues for acquisitions on products, environmental and human rights concerns are expanding, with courts and regulators more than willing to associate a target company’s past sins with the acquirer. Companies need to do very careful due diligence now to understand the businesses they are planning to buy. Boards can no longer disregard ESG (Environment, Social and Governance) issues, and these are showing a real impact on structural plans. Acquiring a company with strong ESG credibility and technology (or carbon credits) helps ESG scoring with investors. On the other hand, divesting subsidiaries that may have environmental or social responsibility skeletons can improve corporate ESG credentials. This is one of the top issues we see today amongst boards.
Here’s some advise for the boards to oversee the M&A process:
(i) Consider any M&A plan from a strategic growth viewpoint. Whether it is digitisation, capacity building, new markets, etc the board should weigh in all issues and advice the CEO.
(ii) Focus on the complete life cycle of the M&A and not just the deal closure alone. The cultural and integration issues also must be looked into till it works well.
(iii) Critically evaluate the readiness of the enterprise to see through the end-to-end M&A process, Treating it as a major project and ensuring the executive-readiness is a key task for the boards today. Ensure that the right individuals are involved with the process and audit committee can reaffirm the readiness.
(iv) Re-validate the merger synergies and underlying assumptions. If needed do a stress-test the assumptions against the different scenarios mapped prior.
(v) Flag and contain emotional involvement of executives that may derail the M&A plan. A clearly articulated business case should be overtaking everything else and guiding the CEO on this is a crucial role board must play.
(vi) Audit and oversight committees must be entrusted with the due diligence. This should not only cover the usual financial and non-financial aspects but also cyber security, corruption, environment and human rights.
(vii) Look at the total integration plan, its duration and its impact on job losses. Many mergers have been disastrous in creating value and without the involvement of the entire senior management team of the acquiring company, it is left to chance. The board cannot shrug this off.
(viii) Insist on a continual improvement plan and update for the board, even if monthly. Set milestones for the executive team and create board-briefing formats for this on a monthly or quarterly basis.
If the board directors are abreast with the latest developments and trends around governance globally, and about M&A challenges above, they should be able to provide a good oversight and help the enterprise they serve to meet its M&A objectives. After all, creating more value for all stakeholders is the ultimate aim of a board in this M&A season.
Muneer is co-founder of the non-profit Medici Institute and a stakeholder in the Silicon Valley-based deep-tech enterprise Rezonent Corp. Ralph is global board advisor, coach and publisherPublished on January 13, 2022