Managing risk in M&A: The board’s perspective

April 2020
By Dr. Gregory Bournet, Partner and Corporate Finance Leader, PwC Malaysia

The role of the board in M&A varies with the significance of a transaction. Be it during buoyant or volatile periods, the board plays a crucial role in major, strategic acquisitions or a divestment of the company or a subsidiary. The acquisition of a business can have a significant impact on both the risk exposures and risk management strategies of the combined entity. Similarly, the divestment of an asset will also put certain responsibilities on the board. In this blog series, we will break down the information flow, milestones and key risks at each stage of the merger and acquisitions (M&A) process as well as the questions boards should be asking.

The board's role in M&A

The principal role of the board differs from the management team of the company. While the management team is involved in the day-to-day operations, the board has a high level view of the business and its resources, enabling them to play a crucial oversight role.

Why is it important for the board to be engaged before, during and after the transaction? What are the key elements to be considered during the M&A journey?

1. Challenging value-creation potential

Long before any M&A proposal is considered, it is important to set an effective strategic framework and process for M&A evaluation and execution. The board should be advised by a sub-committee to challenge the thinking of executives. The sub-committee would be in constant touch with the company’s M&A team on strategy, pipeline of potential targets and emerging deals.

Boards will be able to enhance decision-making in M&A by closely challenging the strategic fit of a potential acquisition, presented business plan, and risks and rewards. Some important questions boards can ask during this period includes:

Is the transaction consistent with overall strategy? How does the deal add shareholder value?
What are risks and costs if the transaction falls through?
Are there appropriate resources to assess and execute the deal?

2. Enhancing the due diligence process

The focus of a robust due diligence would be to analyse and confirm the strategic fit of a potential acquisition. Through this, the board can understand the specific market and competitive landscape of the target. The board would also be able to pressure test management’s assumptions on the performance of the target as a standalone business, as well as within the larger organisation.

The due diligence process should also emphasise risks and the control environment, namely related party transactions, cultural differences, environmental issues, as well as corruption or money laundering risks.

At this stage of the M&A process, the board needs to ask:

What are the deal dynamics? How should the deal be negotiated?
What is the materiality of the due diligence issues? What are the key deal issues or risks?
What are the significant exposures from the period between signing and closing, and after this deal is closed?

3. Realising the value of transactions

Following the completion of a deal, the board should focus on ensuring value realisation from the deal itself. Integration and performance monitoring is essential at this stage. Before and after a deal’s announcement, pressure test the post-merger integration plan’s specifics against stretch growth and cost goals.

Six elements characterise a highly effective integration. They are:

Delivery of expected synergies and value while controlling risks and minimising business disruption
Extensive cross-functional coordination
Documented accountabilities, goals and outcomes
Designated leaders with defined roles and responsibilities
Clearly defined decision-making processes
Involvement of key stakeholders

Boards can use the following questions as a guide to plan integration and performance monitoring:

Who is responsible to execute the short term (100 day) and long term (1 year) integration plans?
Who is accountable to identify, value and prioritise key integration initiatives and synergies based on tangible key performance indices?
What is the anticipated impact on cultural differences and development of people change programmes?

The board’s role on the Sell-Side

1. Secure the best price reasonably available for shareholders

Boards should begin with the end in mind; assuming that their decisions may need to withstand scrutiny, and act throughout the process to maximise shareholders’ value.

2. Assess whether it is an opportune time to sell the company

The decision to sell or not to sell the company is a decision for the board, taking into account the company’s long term strategic plan. Even if the company receives an offer at a premium to the company’s current market value, the board – with the assistance of its advisors – can assess whether shareholder value would be maximised either by selling at that time, selling at a different point in the business cycle or at a different point in the company’s development.

3. Adopt a process that maximises shareholder value

With the assistance of its professional advisors, the board should adopt a process that maximises shareholder value. A good process also mitigates litigation risk. Fairness opinion is critical in assisting the board in exercising due care, and informed, careful reviews of a proposed sale.

Conclusion

Overall, the board’s involvement in M&A deals begins before they become material, and continues until after deal completion. By understanding the deal dynamics and key risks, the board can then provide the right perspective to the management team to fulfill their crucial oversight role. This can be a differentiator for companies as they grow and evolve with the changing times.