Why is it that although many companies, and almost all large ones, grow through mergers and acquisitions, most of these result in a decline in overall value, rather than the envisaged increase?
In the lead-up to such activity – the “engagement period” if you like – shareholders are shown clearly the benefits that the merger or acquisition will bring: lower overall costs, great (combined) market share, stronger sales teams, more experienced management in the combined entity, and so on. All of which is supposed to lead to greater overall value for the shareholders – a case of the proverbial 1+1 resulting in a good deal more than 2.
The reality is, far too often, startlingly different with 1+1 adding up to a good deal less than 2. In other words, significant shareholder value is lost in the process.
Naturally, there are many reasons for this decline in value – most commonly those resulting from a attempt to merge two very different corporate cultures and the consequent fall-out. And much of this happens in the board room.
I’ve seen many cases of incompatible cultures clashing in boardrooms, although I’m fortunate to have avoided this first-hand. Too often, the newly constituted board in an M&A situation will have directors drawn from the two companies proportionate to the value of each part in the transaction and so the acquirer will seek to dominate the acquiree, even when the reason for the acquisition (as is often the case) is that the latter has qualities the former believes is missing from its own company. The result is the departure of the very expertise being acquired and the consequent drop in overall value.
It seems to me that there is one reasonably simple way to increase the likelihood of success – and that is to increase the size of the overall board with the appointment of further Independent Non-Executive Directors (NEDs) when companies are undertaking mergers and acquisitions.
The Corporate Governance Code states “Except for smaller companies, at least half the Board, excluding the Chairman, should comprise Non-Executive Directors determined by the Board to be independent. A smaller company should have at least two independent Non-Executive Directors.” But how many companies actually carry this through?
Should this strong recommendation not be even more strictly adhered to during the M&A process? Bringing a substantial body of independent, experienced NEDs to a board can reduce the level of infighting and help to ensure that the talent/expertise being acquired stays in the transaction.
As we see the global economy slowly recovering, we can expect to see a strong increase in M&A activity as companies seek to assure their future positions while values are still relatively low. This is the time for boards of companies – large and small alike – to become more independent.
- Torys LLP Announces Top Trends in M&A for 2011 (prweb.com)
- Merger and Acquisitions market primed for growth (prweek.com)
I believe that the biggest problem in the boardroom is one tiny word, “EGO”, that unfortunately dominates. Like many “team members”, of sports teams, you always get a few “Non Team Players” with “BIG EGO’s” who want to showboat and or dominate and try to lead via autocratic means rather than leaving their Ego’s at the door & learning to Lead by “Serving” the companies shareholders needs and the other team players needs, “Before their own Ego’s Needs”.
Thanks, Rick. Certainly, individual egos can be a signfiicant issue in the boardroom, as with any group. In M&A situations one often finds “collective ego” causing the problems as the group from one side tries to dominate the other – hence my views on the importance of NEDs in these situations. They can, in effect, be the neutral “referees” to keep things on track.
Agree with Rick about big egos being a substantial problem and NEDs may not be different in that respect.
Do you have any recent figures of what percentage of M&As result in decline? Would be interesting to have a look at that.
As far as egos are concerned, the advantage is that independent NEDs are not part of an “ego bloc” from either company so should be able to act as effective referees.
I’ve not seen credible figures anywhere of the percentage, but my observations from those I’ve watched (primarily in the tech industry) have shown a substantial majority are unsuccessful.