Board Members Share: M&A Survival Strategies

Myrna Soto has been involved in 11 successful M&A transactions over the last two years—and one unmitigated disaster. She’s a director of CMS Energy, TriNet and Popular, as well as a member of other company boards, where executed transactions all seem to be working out well. But Soto is also on the board of Spirit Airlines, which in January saw its proposed $3.8 billion merger with JetBlue Airways blocked by a federal judge who said it would hurt consumers who depend on Spirit’s lower fares.

The amount of time management that the boards of both airlines spent in navigating the transaction—a deal announced in October 2022—is not an outlier. Mergers and acquisitions that used to conclude in 90 days or less now take nine months and longer, with some running into years. According to investment bank Janney Montgomery Scott, deals valued at more than $500 million averaged 347 days to complete in 2023, up from 286 days the prior year.

Thirty percent of the 50 largest acquisitions were plagued by closing delays in 2022 and 2023, up from 15 percent in 2020, according to a McKinsey & Co. study. The postponements were attributed to lengthier regulatory reviews in the U.S. and Europe. A study by Bain & Co. found that while most deals still close in three months, regulatory scrutiny can extend the pre-close period to up to two years. “Time kills deals, compounding the chance they’ll at some point unravel,” says Devin Murphy, former vice chair at Morgan Stanley and current board member at public companies CoreCivic and Phillips Edison & Co.

The longer deals take to close, the greater the potential for negotiation deadlocks, talent departures and unexpected market shifts to occur, eroding the value creation story. As the clock ticks, negotiations steal focus from day-to-day business activities and the board’s agenda while increasing the risk of competitors poaching customers and employees or a deal’s details leaking.

Drawn-out negotiations also take an emotional toll on members of M&A teams and boards, as with the futile JetBlue-Spirit combination. The disproportionate amount of time put into the effort was draining and frustrating, said Soto, speaking at Corporate Board Member’s 2024 Directors Forum in March. In the first four months following JetBlue’s unsolicited offer in March 2022, the board held 27 meetings on the matter. Although JetBlue was confident the deal would be greenlighted, Spirit’s management and board felt otherwise. “We never in our wildest dreams thought JetBlue would be interested in us. We always thought [a merger would involve] a combination of like-like carriers,” Soto said.

This combination was already underway. In February 2022, Frontier Airlines and Spirit announced plans to merge to create a larger national low-fare carrier. JetBlue’s hostile bid upended the deal. Spirit reportedly referred to the offer as a “cynical attempt to disrupt” the merger with Frontier. “We felt a more palatable path was [combining] Spirit and Frontier because of the like-like business model,” Soto said.

After fielding seven back-and-forth offers from JetBlue and Frontier, JetBlue bypassed Spirit’s board to go directly to shareholders, who accepted the $3.8 billion buyout in October 2022. Soto summed up the rationale: “The industrial logic of the Frontier-Spirit combination didn’t matter the minute the economics changed so dramatically on the JetBlue deal. [It] was economically structured so there was no way that shareholders would reject it.”

In March 2023, the Department of Justice and several state attorneys general sued to halt the transaction, asserting it would lead to higher fares and fewer choices for travelers. In January 2024, a federal court judge concurred. Two months later, JetBlue and Spirit terminated their agreement, with JetBlue paying Spirit $69 million to resolve outstanding matters. The fruitless two-year M&A journey was costly, says Soto. “At the time of the deal [with JetBlue], our market cap was $2.4 billion… now it’s $700 million,” she said. “This is an existential crisis for both companies. I wonder how the DOJ would feel if either one of us go bankrupt or have to lay off a large amount of staff or downsize our position in markets they were so eager to make sure were protected.

In early October, Soto’s contemplations appeared imminent. Amid mounting financial losses, The Wall Street Journal reported that Spirit is considering filing for bankruptcy protection. “I’m licking my wounds with this failed deal, but the reality is that any deal that has a forced combination of any kind, the DOJ will be against it.”

Protectionism Pounces

The DOJ is not alone among federal agencies in the Biden Administration scrutinizing M&A transactions across industry sectors. The Federal Trade Commission, whose chair Lina Khan has been dubbed an antitrust warrior, is another perceived opponent. Since January, Khan has blocked the mergers of mattress manufacturers Tempur Sealy and Mattress Firm, luxury retailers Tapestry (Coach and Kate Spade) and Capri Holdings (Michael Kors) and supermarket chains Kroger and Albertson, among others.

Few individuals are as close to the FTC’s antitrust decisions as Charles Ruck, partner and global chair of Latham & Watkins’s corporate department. The firm advised Tapestry in its merger with Capri Holdings and filed for a trial following the FTC’s lawsuit blocking the deal. The firm also represented the largest shareholder in Albertson’s negotiations with Kroger. “Kroger offered a remedy in advance to sell 400 stores to a competitor, but that still wasn’t enough [for the FTC],” Ruck says.

The Tapestry-Capri deal was blocked based on the FTC’s assertion that it would eliminate competition between Tapestry’s Coach and Kate Spade brands and Capri’s Michael Kors brand. Ruck is curious if another luxury fashion deal will be challenged on the same grounds. In July 2024, HBC, the parent company of Saks Fifth Avenue, announced an agreement to acquire Neiman Marcus Group for $2.65 billion.

“The real competitor for Tapestry-Capri is LVMH [$95.2b in revenues in 2023], an iconic house of luxury brands they’re trying to catch up to,” says Ruck. “But that’s not how the government looks at it, effectively keeping these companies separate in the middle market. We hope a judge will agree.”

Khan also unraveled the Kroger-Albertson deal, a transaction that looked good on paper, says Murphy, who is familiar with the deal’s specifics because it’s ancillary to the business of Phillips Edison, a real estate investment trust specializing in the grocery industry. “For more than a year and a half, Kroger and Albertson kept doing more and more to get the FTC’s approval, but no matter what they did, the FTC asked for more, dragging out the timeline, knowing that time kills deals,” Murphy says.

He’s flummoxed by the FTC’s rationale, given the highly competitive nature of the grocery store sector. In June, IBISWorld tallied 62,383 supermarkets and grocery stores in the U.S. “If you have two motivated parties that think the best thing for the business is to combine, as long as it’s not negative for the population, it should be allowed to happen,” Murphy says.

Another M&A transaction in the regulatory crosshairs is Nippon Steel’s $14.9 billion acquisition of U.S. Steel, announced in December 2023 and subsequently approved by U.S. Steel shareholders. In May 2024, Nippon Steel pushed the planned closing to the third or fourth quarter, due to a request by the DOJ for additional information and documents connected to an antitrust review of the transaction under the Hart-Scott-Rodino Act.

Geopolitics factor in the uncertain outcome. Both President Joe Biden and former President Donald Trump opposed the deal over national security concerns, and in late June 2024, U.S. senators Bob Casey, Sherrod Brown and John Fetterman wrote that it was a “clear and present threat… to American workers and a critical industry.”

Michael Quillen, who served on the board at Martin Marietta for 16 years before stepping down in May, says U.S. Steel had no better suitor than Nippon Steel, due to very few domestic steel companies to combine with. Prior to Nippon Steel’s offer, U.S. Steel was the focus of a bidding war between competitor Cleveland-Cliffs and Esmark, a privately held company.

“Cleveland-Cliffs made an offer to buy U.S. Steel, a deal that had the backing of the steel union,” says Quillen. But Nippon’s offer was so much better; it was a no-brainer for the board. Then politics and the union got involved, spreading the message that the Japanese would shut down [American] plants. It became controversial.”

The possibility that federal agencies will block a merger has elevated the importance of early risk appraisals, says Bryan T. Martin, a national managing partner at Deloitte specializing in life sciences and healthcare, who says his M&A clients are requesting phase-one diligence on the FTC. “It’s the first time in 25 years I’ve heard of this,” Martin says. “They want to be sure some issue doesn’t trip up the proceedings and, if the deal is challenged, there’s a solid game plan in place well in advance.”

Family Matters

Geopolitical tensions and complex regulatory challenges aren’t the only obstacles jeopardizing deal closings. Inexperienced M&A advisors and special committees formed by the board to evaluate and sometimes negotiate a transaction can also be time-delayers. “When you have sophisticated bankers and lawyers on both sides eager to make the transaction happen, it takes 60 days start to finish,” says Murphy. “When you have unsophisticated advisors on either side or both, they become overly conservative and careful every step of the way, adding more and more time to the process.”

Forming a board committee to ensure appropriate oversight can also backfire. In theory, a special board committee would ensure thorough oversight, but in practice, bringing in opinions and assessments can turn into a vehicle that obstructs a deal’s progress, undoing all the management team’s work. A group of senior executives can also create friction that ultimately extends the negotiations beyond the breaking point, adds Murphy. “If you want to kill a deal, there’s a million things you can find to do it,” he says.

Distraction and Deal Fatigue

When M&A negotiations progress at a snail’s pace, deal fatigue sets in. Unending deliberations foster frustration and helplessness for both parties. Unable to reach a consensus, one party may double down on a position or introduce a new proposal, further prolonging the timeline. Negotiations may pause to allow tempers to cool. As Soto describes Spirit’s journey, “The dynamics between acquirer and acquiree became a cat-and-mouse game that was exhaustive.”

As time wears on, the world moves on. Markets change, elections occur, synergies weaken, lawsuits emerge, customers entertain alternatives. Individual members of the M&A team toss in the towel, exiting to pursue more fulfilling tasks. Distraction sets in, particularly for the seller, Ruck says, with adverse business consequences. “The seller’s distraction is greater since the number one goal becomes getting the deal done, which affects running the business in an optimal way,” he explains. “Employees become distracted, asking, ‘What’s in it for me? Will I have a position when the deal closes?’ If the transaction takes 60 days, that’s one thing, but if it takes 18 months, they’re more apt not to wait around for answers.”

“Morale can be wounded pretty easily,” says Quillen. “The bean counters figure out the math, but they need to consider the impact on people. The longer time proceeds, the greater the risk for both sides of someone important jumping ship.”

Transactions that balloon in time also increase the risk of a deal-damaging leak. “Every major business publication now has people who just cover M&A and are really proud when they scoop a story,” says Ruck. “At the same time, people with an agenda who don’t want the deal to survive will leak details to kill it with a negative story.”

Susan Fleming can relate. She was a third-year M&A analyst at Morgan Stanley in 1994 when the investment bank’s plans to acquire the UK’s largest investment bank, S.G. Warburg, were leaked. “I was a member of the group negotiating the deal, which had lots of complexity and was moving fast when the details leaked,” she says. She cited Mercury Asset Management Group, 75 percent owned by Warburg, as the sticking point. Once Mercury caught wind of the plan, they opposed the deal, killing it, says Fleming, who is a board member at RLI and Virtus Investment Partners.

Social media now offers a venue where anyone can disclose information about a rumored transaction or one that’s underway. “Whether the leak is accurate or not, it has an impact on the labor force and in communities concerned that a local factory or office will close,” says Quillen. “Once the negative opinion is expressed, it spreads like wildfire, putting pressure on boards that didn’t exist 10 years ago.”

Staying On Track

While little can be done to escape steamrolling regulatory obstruction, other than conduct the aforementioned diligence into potential issues in advance, an educated, well-prepared and orderly approach that accounts for all contingencies will keep discussions on track and on time, with minimal effect on the business.

This approach begins with selecting first-rate advisors. “You need to put together a team of advisors who knows what’s a risk and not a risk, and what’s an opportunity and not an opportunity,” says Susan Lynch, a board member at Onto Innovation and Allegro MicroSystems. “You don’t get that without experience, people who know your industry and are picky. Otherwise, the board will be constantly pushing them, extending the length of the negotiations.”

Regulatory experience is another plus. “Clearly, you want to hire a really good outside law firm and investment bank, but if you’re in a highly regulated industry, you need someone on your team who understands and can anticipate regulatory challenges,” says Fleming, pointing to a specialist like a former FTC or SEC compliance officer as candidates.

If a planned transaction appears to be headed for a series of high regulatory hurdles, a decision must be reached on whether the effort merits the hoped-for outcome. “A deal that is likely to receive regulatory scrutiny takes tremendous conviction in the value of the transaction by both parties,” says Suzanne Kumar, EVP of M&A and divestitures at Bain. “Management and boards must have confidence that the value is there and is worth the time that will be put into it, knowing there’s a likelihood of unexpected twists and turns.”

To keep negotiations proceeding expeditiously, Ruck counsels the merits of less rigid covenants, the enforceable promises between the parties in the purchase agreement to do or not do something. “In the old days, we would try to tighten down the covenants, but that’s no longer workable. The longer the deal takes, the more flexibility companies need to run the business,” he explains. He cites a covenant restricting one party from increasing executive compensation without the other party’s approval. “If the deal drags on and you’re about to lose a key senior vice president because she doesn’t know where she fits in the combined organization, you’re going to want to pay them more to keep them around,” he says.

Several board members brought up the importance of a significant breakup fee as a way to keep both parties focused on a time frame to close the deal. Typically, the fees range from 1 percent to 5 percent of the deal’s value. “The [size of the] transaction cancellation fee is a signal of commitment,” says Kumar. Ruck agrees: “One of the biggest ways to keep the negotiations on track to close quickly is the breakup fee—who pays who if the FTC says no.”

To forestall friction delaying the negotiations, Murphy advises to immediately bring it to the attention of external advisors. “If the board thinks the transaction makes sense but certain executives disagree and look to create friction, the advisors will generally look to extract the executives, creating an economic incentive anywhere from two or three times their compensation to make them compliant,” he says.

To reduce the possibility of a negative leak, M&A commentary should be limited to the internal team and advisors, using confidential names in all private material, says Fleming. She further advises the individuals not to directly reference the transaction in emails, agreeing beforehand on code names to preserve secrecy.

Soto reflects that to maintain utmost privacy in the board’s dealings with JetBlue, “many of us found ourselves hiding from the press; it was not our role or position to comment, especially when we were the ones being acquired,” she says. “We were very cautious about our public statements at the origin of the deal.”

To reduce deal fatigue, several board members commented on the value of both parties lining up subject matter experts in advance to provide guidance on technical issues, disclose material information early on and assign a project manager to report on the completion of specific action steps. “There’s this fallacy that we’ve gone this far to close the deal, so we can’t stop now,” says Kumar. “It’s up to the board to challenge whether the deal still makes sense and [make sure] management has a plan B in place that will make sense to investors if the deal doesn’t go through.”

Facing a tough road ahead, Spirit Airlines was polishing up its plan B in June, having ruled out filing for Chapter 11 bankruptcy. “History has shown that not all will come true,” Soto says. “Even in a straightforward deal, I’d encourage every [board member] to think, ‘If this blows up, what does it mean for us?’”