Effective Board Oversight of M&A

One of the most important areas of board decision-making involves reviewing merger and acquisition transactions. Bill Bates is a partner at the law firm of King & Spalding who serves as co-head of the firm's Mergers & Acquisitions practice. Over the past two decades, he's worked with boards of directors on more than 40 merger or acquisition-related transactions. During that time he's seen a sea change in how boards engage with management vis-à-vis M&A: many good practices and a number of terrible mistakes. He spoke recently with BusinessWeek.com columnist Beverly Behan to share his views. Edited excerpts of their conversation follow:

Bill, do boards of directors engage differently today when it comes to reviewing and approving deals than they did 10 years ago? Absolutely. Ten years ago, it was not that uncommon for a major acquisition to be presented and approved in the course of a single board meeting. That's almost unheard of today unless it is a very small add-on type of acquisition. Today, board review and approval of sizeable acquisitions or a major merger is a process that typically goes on over several meetings.

What are some of the key things a board member should focus on in reviewing M&A transactions? First, focus on the risks inherent in the deal. Ask point blank what management sees as the major risks and surface anything you are concerned about. On one transaction I was involved in, midway through the due diligence process the board held a half-day meeting with the lawyers, the accountants, and the deal team to vet what was surfacing.

There is typically some update given to the board at various stages of the due diligence process, but this was a major deal and I thought the very comprehensive review that was done with the board was [very important to do].

Second, drill down on the benefits that the deal is supposed to afford. It's pretty easy to demonstrate the cost savings in most cases. What's much tougher is to demonstrate the additional revenues that the synergies of the deal are expected to create. I'd urge board members to ask probing questions: How realistic are the revenue estimates from these synergies? What is the plan to achieve them? What other benefits are expected and how does this particular deal advance the company's goals and strategy? The board needs to understand clearly (and agree) why the deal is being done.

The third area the board should focus on is the integration strategy. Before the deal is approved, board members need to carefully review management's integration plan: Who will be leading the integration efforts? What are some of the similarities and differences in the cultures of the two organizations and how will these be addressed? Are there key executives from the acquired company that will be critical to retain—and are they at risk? The board should also get regular updates on progress of the integration strategy at board meetings after the deal is approved.

What are some of the worst mistakes boards make in reviewing and approving M&A transactions? Co-CEOs is probably the most classic mistake along with the concept of having two headquarters. Choose a CEO, choose a headquarters, and move forward. Often one of the two CEOs involved in a merger will become chairman and the other becomes CEO, a model that I think works a lot better. However, you still need to ensure you have clear lines of authority for these two roles.

As far as the headquarters issue goes, you will have two headquarters to consider, often in different cities. You need to choose one and get your combined executive team assembled there. You can use the other as some kind of office space for the organization. If you try to maintain two headquarters, you will inevitably continue a sense of working as two different companies rather than a combined entity.

What advice do you have for CEOs and top executives in presenting a deal to their boards? Management's overall objective in presenting any transaction to the board should be that when board members come out of the meeting, every one of them can articulate: "That's why we're doing this deal."

For example, they can tell you: It doubles down on a strength we have as a company, gets us into an area geographically or product-wise where we need to go, etc. Sometimes I think management places too much emphasis purely on the financials of the transaction. When you present a "deal deck" to your board, it should cover the deal as a whole—the strategic fit, the people, the synergies, as well as the financials.

Every board member has a duty of care as part of his/her fiduciary duties in decision-making. Management needs to ensure that the board is informed in a way that enables your directors to fulfill that duty. I think it is a good practice to provide the board with a summary of the key terms of the merger agreement. What are the pitfalls and risks? What triggers the termination fee on the deal?

What's one of the most innovative practices you've ever seen a board adopt in this area? Once I was involved in an international merger where my client's board was sufficiently small that all of the board members were going to go onto the board of the merged entity. Before the agreement was finalized, board members and executives from both companies had dinner together in a private dining room.

I thought this was a particularly important step that enhanced the due diligence for both sides because of the cultural differences involved in an international transaction of this nature. I'm not saying you would want to do this on every deal, but I thought it was a very good idea in this situation and I'd recommend this to other boards in appropriate circumstances.

Before it's here, it's on the Bloomberg Terminal.