Dealing with Today’s Complex Challenges that Shape the Future of a Company
In 2020, the transactions that made it to the global M&A league tables based on deal value were that of Goldman Sachs ($31M), JP Morgan ($20), and BofA Securities Inc. ($19M). However, these pale in comparison to pre-COVID times, where we witnessed mammoth M&A transactions.
For example, Walt Disney’s acquisition of 21st Century Fox for $84B in 2017 and Bristol-Myers Squibb’s acquisition of Celgene for $79B in 2019. The fact that M&A transactions continue is a reminder that optimism still prevails in board rooms.
M&A in a New Post-COVID Reality
During the global economic slowdown, triggered by the pandemic, M&A industry fundamentals remained sound, albeit hardened by the new reality that companies, CEOs, board members, and investors are faced with.
As COVID-19 continues to reshape much of the business landscape throughout the world, deal flow and weak profitability are just some of the concerns that board members have to deal with amid the combined pressure of sluggish progress and continuous negative rates on net interest income.
M&A activity in a post-COVID business landscape demands that key decision-makers make the right moves swiftly and confidently so that they can avoid missing out on opportunities as they arise. This will require a fair share of clarity, along with an in-depth understanding of – the deal.
But owning both of these qualities is easier said than done, and in many instances, has proven to be difficult to achieve as the M&A landscape grows more complex in the post-pandemic era.
Can Optimism Prevail?
Despite the challenges which have led to slow activity in the M&A space and an unlikely v-shaped recovery of the global economy, CEOs and board members still see signs of life and are confident about 2021. Driving maximum deal value means having a firm understanding of the key challenges on both sides of the transaction. Here, we are going to focus on the art of the deal in M&A from a board’s perspective.
Who Pays the Price of a Bad Deal?
The CEO of an organization always plays an integral role in the M&A decision-making process. This is because boards tend to give a considerable amount of leeway to CEOs to form an acquisition strategy.
But the inability of boards to utilize any form of punishment, such as reduced pay or removal when a deal goes south, perpetuates the oftentimes reckless decision-making of CEOs. This normally occurs due to a vast information gap between the CEO and the rest of the board and their shareholders.
Since CEOs often control the deal from its inception, they often are not ready to relinquish that control at any point. This information asymmetry that’s furthered by specialized industry knowledge makes it even more difficult for boards and shareholders to rectify later on.
Strategy for M&A Success
Rather than relying on the perceived expertise of the CEO when it comes to determining the viability of an acquisition, board members and shareholders need to play a more active role in the decision-making process. This includes;
- Designating an implementation champion (designating a one-point person as your implementation champion streamlines communication and information flow back to the board)
- Considering individual, group and social factors
- Gaining goal clarity
- Having a sound strategy
- Working towards being inclusive for a comprehensive view (this means, getting all executives and operations on board to perform a pre-merger risk assessment
- Considering the congruence of ERM (Enterprise Risk Management) in two companies
- Maintaining objectivity
- Carrying out a rigorous analysis
- Evaluation of results-based compensation
Acquisitions constitute one of the more central strategic decisions made by executives. Performance pressures and specialized industry knowledge often make CEOs a common source for the inception of the acquisition idea, but not all of them get it right when it comes to covering key areas such as merger strategy, organization targeting, planning implementation, success measures, compensation and incentives, and so on.
Inappropriate decision-making, as well as poor negotiations, can lead to inferior acquisition outcomes at best, and at worst, have far-reaching debilitating consequences for the company acquiring the asset.