Considering an acquisition? What boards need to do before, during, and after the deal

Transcription

1 December 2016 Considering an acquisition? What boards need to do before, during, and after the deal Acquisitions offer advantages as a path to growth. But many deals fail to deliver on their potential value, so boards need to take an active role throughout the process. Making an acquisition is a major step for a company. For all the possible benefits, however, there are many challenges that can derail a deal and destroy the anticipated shareholder value. Navigating those pitfalls is vital to an acquisition delivering on its potential. Here are the steps boards should take at each stage of an acquisition. pwc.com/us/governanceinsightscenter pwc.com/us/deals

2 The appeal of an acquisition is clear. Adding the right business to your arsenal can boost your customer base, increase revenue, and even reduce costs. But making an acquisition is a huge decision for a company, and before taking the plunge you need to be confident it s the right move with the right target. This applies not only to an individual deal, but to how acquisitions fit into your company s overall strategy. Depending on the size of the target and the capabilities it brings, an acquisition can transform your company not only what you offer customers, but how and at what cost you deliver products and services to them. Combining another company s culture with yours also can affect company identity and raise questions about the new organization s priorities and goals. Deal damage? More than 60% of M&A deals destroy shareholder value Source: An analysis of 2,500 M&A deals by L.E.K. Consulting. Alan Lewis and Dan McKone, So Many M&A Deals Fail Because Companies Overlook This Simple Strategy, Harvard Business Review, May 10, 2016; 2

3 In the end, making an acquisition requires a significant amount of time and money, and it often tests the patience of leadership both executives and boards of directors. Even if executed as planned, many acquisitions fail to deliver the expected value for shareholders. History has shown how acquisitions can make or break a company; in extreme cases, companies have had to write off the entire value of the deal. When an acquisition succeeds, however, it can be a clear signal that a company is evolving as it explores new paths to growth. In this paper, we summarize what a board needs to do before, during, and after an acquisition to make it a success. Number of acquisitions over past 16 years Historical US M&A trends: LTM Sep-16 16,000 # of deals 14,096 14,000 12,000 $2,027 10,000 8,000 6,000 9,628 8,586 $1,040 9,280 14,064 12,999 11,837 11,429 10,962 10,706 $2,065 10,433 10,704 10,780 $1,914 9,679 $1,397 $1,283 $1,309 $1,055 $1,042 $1,030 $1,124 $887 12,360 12,343 $2,201 $2,384 11,372 $1,734 4,000 $521 $677 2, Sep 2016 last 12 US deal value ($B) # of US deals months Note: All deals over $100B have been excluded from the analysis above. Source: Thomson Reuters, with PwC analysis. 3

4 Opportunities for growth While some years see more activity than others, but acquisitions are a constant in the business world. Megadeals may dominate one year, only to see a slowdown the following year. Regardless of the pace, acquisitions consistently remain a consideration for financially-stable companies searching for a way to meet investors demands for growth. Benefits of an acquisition Acquisitions can provide access to new technology or different capabilities that could improve or expand operations. They can also be a way for a business to enter a new market, whether a product or location, including in other countries where establishing new locations could be difficult. An acquisition can also allow a company to ultimately make its operations or processes more efficient, saving money in the long run. 4

5 Before making an acquisition One of the most important responsibilities a board has is to oversee the company s strategy. That includes understanding if and how different growth options, including acquisitions, are part of that strategy. Even before your company moves on a target, it should be confident that acquisitions in general are the right way to grow. A company s acquisition strategy can be complex. Some acquisitions fit the company s long-term plan to create value for shareholders. They can provide growth when organic growth has otherwise been difficult. In other cases, shareholders may be influencing acquisition strategy. This is especially true if certain shareholders have a short-term view and suggest that management go after deals they expect to deliver quick gains. Directors need to recognize these different drivers. And they need to hear from management a clear rationale for and connection to company strategy each time management presents a potential acquisition. The competitive landscape can also be a factor in acquisitions. Management should inform the board about other industry deals. That allows directors to understand if their company is simply taking a me too approach or is truly charting its own growth path with an acquisition strategy. Mergers and acquisitions often promise many benefits, but according to various studies and industry experts, the failure rate for such deals is at least 50% and as much as 90%. 5

6 Which deals should boards get involved in? First, it s important to agree on when the board should be involved in an acquisition. Not all deals are equal, and knowing in advance what factors trigger a board s involvement will prevent confusion about the board s role during an active acquisition. Those factors might be quantitative, like deal size. Or they can be qualitative, such as when a deal is important to executing the strategy. The company s Delegation of Authority policy can help clarify the criteria for a board s involvement in deals. How deeply a board is involved often starts with the size of the company. Boards of companies that are mid-cap and smaller usually are engaged in every deal. At large corporations, only the biggest deals or those with a certain level of risk may warrant a board s thorough attention. Those companies may do tuck-in acquisitions merging a small acquired business with an existing division without direct board oversight. Companies that regularly pursue acquisitions may benefit from having boards that fully understand how management approaches and executes a deal. Directors often don t have direct experience in deals. So going through how the company does deals in general can give the board a more solid foundation for considering individual acquisitions. If a company is a serial acquirer, the board should be informed of its list of targets on a regular basis. Management can discuss those targets at every board meeting sharing the long-term plan for each, the status of due diligence, pricing, and other factors and how views of how desirable those targets are may be shifting. Directors can give feedback on that due diligence and share any concerns and advice in real time. Then, by the time management asks for board approval, the board is well-positioned to make its decision. 6

7 During the acquisition Once a board understands management s rationale for an acquisition and how it fits with the company s strategy, it needs to review the benefits and risks of the deal. It may take repeated discussions with management to fully understand how a transaction will impact shareholders, customers, employees, and other stakeholders. vulnerabilities to an existing enterprise. Yet many companies don t invest appropriate resources to analyzing cybersecurity during the deal process. As a result, you can have situations when a massive data breach at an acquisition target that comes to light before the acquisition closes can be an issue in closing the deal. Risks are real and can affect value Companies have to take the bad with the good in any deal, and boards should push management to assess the key risks that can affect the value of an acquisition. These range from the target s vulnerability to lawsuits, underpayment of taxes, underfunding certain parts of the organization, to the presence of activist investors. A target s environmental record has also become increasingly important. And acquiring companies in other countries may introduce or add cross-border risks such as Foreign Corrupt Practices Act violations as well as different regulatory hurdles. In general, the farther the target is from the company s current situation geographically, operationally, or product-wise the riskier the deal. In addition, today s digital, connected world has made cybersecurity a top priority at most companies. Acquisitions heighten the potential risks by introducing new systems and their Dealmakers discuss cyber risks 78% Despite 83% 90% say cybersecurity isn't analyzed in depth as part of the M&A due diligence process. saying a deal could be abandoned if previous breaches were identified. saying such breaches could reduce the deal's value. Source: Freshfields Bruckhaus Deringer, Cybersecurity in M&A, July Freshfields surveyed 214 global dealmakers from corporates, financial institutions, investors, and legal services (63% from North America, 34% from Europe, 3% from the rest of the world) 7

8 Depending on the risks, the board may want to discuss if the target still should be acquired or if another type of deal structure makes more sense. When considering the goals, a joint venture or an alliance could be a better approach to unlocking value while managing risk. Look for culture clashes The due diligence phase is also a time for directors to raise the issue of culture. They should confirm that management has considered any hurdles to integrating the target into their company and areas where the cultures align. Culture should be considered before the deal closes so the integration efforts can be focused and efficient. Management should be able to share with the board a clear understanding of the target s culture and how it will be treated going forward. This culture audit is important in developing a plan to assimilate the organization post-acquisition. Seeking outside opinions Companies may enlist outside support for certain acquisitions. Strategic advisors can help a company evaluate an acquisition and can be valuable in confirming or questioning management s risk assessment and valuations. Outside advisors can give management independent insight to the pluses and minuses of a deal so the company can make an informed decision about whether and how to proceed. For each transaction, directors should be aware of the outside advisors used by the company to evaluate the deal. They may decide to challenge management on any advice received especially for significant acquisitions. Boards may also want to consider setting criteria for bringing in their own legal counsel or other advisors for acquisitions. That criteria will be useful in making decisions to engage separate counsel for a particular deal. Additional subject matter experts may be helpful as discussions can get complicated when you have different advisors with different positions on a particular matter. Still, boards need to be sure the deal is right for the company before approving it and not delegate the decision to advisor. Directors should be sure to get regular updates from management but should also take advantage of opportunities to discuss the deal without management present. Such private sessions are especially valuable in helping the board feel comfortable pushing on any assumptions in the valuation or voicing concerns about overzealous pricing or deal fever. For a particularly significant deal, boards will form a special committee so that a subset of directors can take on the increased workload of monitoring a potential acquisition. 8

9 After the acquisition In most deals, the period after the acquisition closes is crucial. Failure to successfully integrate the employees, processes, systems, and culture from each organization can seriously hamper a deal s benefits. It s also essential to have a robust post-deal communications strategy that explains the advantages of the acquisition to key external audiences and updates employees across the combined enterprise about the progress of the integration. The integration challenge Talent is often a major concern in acquisitions. Some executives and their teams are key to the deal value. Others may not be needed beyond a transition point. Management needs to figure out who fits into which category. This can be a sensitive decision that raises short-term issues, such as stay bonuses. It also can have long-term consequences, particularly if redundancies aren t adequately addressed. In general, how a company persuades current employees to stay post-acquisition can be critical to a deal s success. Boards should ask management to determine what would keep employees engaged and motivated and be aware that it may extend beyond money. Boards should also ask how management plans to align the companies respective values and avoid potential rifts. Acquisitions naturally raise fears among employees of a loss of the target company s identity and history. Boards should ask whether integration plans respect the legacy of both companies. Sensitivity to employee concerns could aid in retention. In cross-border deals, cultural concerns may include managing different worldviews along with the workplace environment and practices. Boards need to be aware of the cultural issues that may arise with acquisitions in other countries. A change that seems minor to a US-based company could have much more significance to people working in another country. Culture clashes can cause integration headaches 9

10 Keeping all audiences informed... and keeping up after the fact Communication and transparency are vital during the integration, and companies should clearly articulate their reasons for the deal. Both the company and the target benefit from an internal communication plan that keeps employees and vendors informed during the entire process. Besides limiting uncertainty, the plan can boost motivation among teams. The board should also take a look at itself post-acquisition. Some companies benefit by changing their board makeup after large or transformational deals. The post-merger board: who stays? Among mergers of Fortune 500 companies from Management should consider all communication angles not just financial metrics, but how the investment will impact the company in such areas as branding, talent development, and organizational culture. Boards should ask how well the target is fitting in and get regular updates, including performance metrics, cost synergies, and how management is addressing any culture clashes. Externally, acquisitions often generate interest in the market, and the less confusion about why a deal was done, the better. Boards will want to be sure management clearly explains to investors the rationale for a deal and how it fits into the company s overall growth strategy if it s adjacent, geographical, transformational, or has some other reason and benefit. When Wall Street understands the message, acquisitions are usually viewed more favorably. 83% of acquiring board directors stay 34% 29% while of inside directors on the target board stay of outside directors on the target board stay Source: Kevin W. McLaughlin and Chinmoy Ghosh, The Dynamics of Post-Merger Boards: Retention Decisions and Performance Effects, The University of Connecticut, July Monitoring the acquisition post-deal allows boards to assess whether the deal met the objectives and understand how much value it ultimately added. Determining what made a specific acquisition a success also can help improve the overall process, from strategy to integration. This will better arm the board and the company for future deals. 10

11 In conclusion Exploring an acquisition means your company is ready to take a big step toward growth. The guidance we ve shared will help better prepare boards to address the challenges that come with any acquisition. 11

12 pwc.com/us/governanceinsightscenter pwc.com/us/deals How PwC can help: To have a deeper discussion about how this topic might impact your business, please contact your engagement partner or a member of PwC s Governance Insights Center or Deals practice. Paula Loop Leader Governance Insights Center (646) paula.loop@pwc.com Catherine Bromilow Partner Governance Insights Center (973) catherine.bromilow@pwc.com Curt Moldenhauer Partner US Acquisitions Leader, PwC s Deals Practice (408) curt.moldenhauer@pwc.com Project team Jefferson George Senior Research Fellow US Thought Leadership Institute Elizabeth Strott Research Fellow US Thought Leadership Institute Christine Carey Marketing Governance Insights Center Jodi Eckberg Marketing Leader Deals Practice Sarah Gerlock Marketing Leader US Acquisitions Deals Practice Daniel Graffe Design Creative Team pwc.com This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details DG