The M&A landscape has changed dramatically. Mergers and acquisitions are a key tool companies use to quickly add innovation, new technologies and new lines of business to their operations. According to EY’s Transaction Advisory Services, in the US, there were 1,259 M&A deals worth $1.72 Trillion in 2018, up from 1,163 deals worth $1.11 Trillion in 2017. EY predicted similarly robust deal making in 2019, largely due to a strong economy, the affect tariffs and other geopolitical conflicts are having on supply chains and how new technologies continue to reshape industries and business models.
A panel discussion on the board’s role in M&A deals was held in New York last week as author and founding principal of the Capital Experts Services consulting firm Alexandra Reed Lajoux released the Fifth Edition of “The Art of M&A: A Merger, Acquisition and Buyout Guide” with several contributors to the book. Lajoux said an update of the book was necessary because many things that affect M&A deals have changed over the last 10 years. Here are a few items she and the contributors to the book said directors should consider before doing M&A deals in today’s environment:
The 2017 tax bill has changed things. In an interview prior to the panel, Lajoux said the Tax Cuts and Jobs Act of 2017 made it less favorable to take on debt in M&A deals. She said companies can no longer deduct all of the debt taken on in deals from their taxes – only some of it – “so, the leveraged deals are not as interesting financially.” As a result boards should be sure to look at the tax consequences of M&A deals more carefully.
The highest value for a sale may be debatable. Of course one of the key responsibilities for the board is to get the “highest value” if a company is for sale. During the panel discussion, Francis Pileggi, a respected lawyer who writes the Delaware Corporate & Commercial Litigation Blog, pointed out that “reasonable people can differ as to what the highest value is.” In today’s context, this means directors might consider expanding the definition of “value”, especially in the wake of The Business Roundtable redefining the purpose of a corporation. There may be new pressure on some companies to value M&A deals not only in the best interest of the stock holders, but in the best interest of all stakeholders. Although this would likely affect a very small number of transactions, directors may want to consider if the reaction of their customers and the communities they serve to a specific deal may have an adverse impact on long term growth.
Less is still more when publicizing the deal. Independent investor relations counselor Robert Ferris said both the acquiring and the target companies in any deal should keep all merger discussions confidential, even if leaking information could give them an advantage in the market. Only a simple press statement with no terms disclosed should be issued when the parties have agreed to a deal in principle. He reminds directors that “the vast majority of M&A proposals die between the agreement in principle and deal consummation, principally because of a disagreement in financial terms,” adding that due diligence can take months. “The market is smart. It will crunch the numbers on its own terms and value accordingly.”
Make sure company disclosure policies are comprehensive and enforceable. Ferris also stressed that boards should “ensure that your company’s disclosure policies and procedures are up to date with the latest best practices and that all employees know and are bound by the rule that the company only speaks with one voice and through a small number of individuals who are authorized to speak. No one else has the right or authority to speak or opine publically or privately on corporate matters. This includes internet chat or inadvertent pillow talk. In addition to regulatory infringement, it could actually kill the deal.”
Consider the financial incentives the merged company should offer. Solange Charas, who heads her own consulting firm that specializes in HR analytics, said that prior to an acquisition, the acquiring board must have a clear understanding of the type of incentives that are driving the behavior of executives at both companies. When it comes to governance, economic value creation and overall corporate behavior, she said companies must look more carefully at “what are the program designs incenting people to do to get their reward,” adding that, “what we’re looking for is some type of alignment between the two organizations.”
Strengthen analysis of human capital performance. In January, the SEC said that companies should actually view human capital as an intangible asset rather than an expense. Charas said that has moved some investor organizations to request certain companies disclose human capital behavior in a matrix as a way for investors to understand how human capital is actually contributing to their bottom line performance. “One of the things we need to think about to make mergers and acquisitions more successful is to actually understand how people impact the going forward strategy and to look at due diligence from an HR perspective in a new way that really understands sustainability and value creation,” she said.
Re-evaluate the cost of credit in M&A deals. Francis Byrd, managing partner of Alchemy Strategies Partners, explained that the ability of credit rating agencies Standard & Poor’s, Moody’s and Finch to impact the cost and the amount of capital that is used in a deal is very significant, and if debt is needed to do a deal boards need to think twice. “You really want to think about how you’re going to pay for this longer term,” he said. “That can have an impact on the thinking of the shape and the structure of the deal.”