Making an acquisition is a major step for a company. For all the possible
Making an acquisition is a major step for a company. For all the possible
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What Boards Need to Know Before, During, and After an Acquisition

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August 23, 2021 | PricewaterhouseCoopers LLP

Thanks to Maria Castañón Moats and Leah Malone

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.
The COVID-19 pandemic and its follow-on effects have changed the economic situation for most companies. Many are experiencing financial hardship and depressed income. But others have cash. And unique opportunities may be available to those with capital to spend. 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 executing a deal during a global pandemic poses unique challenges. 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 also 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.
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    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 post, we summarize what a board needs to do before, during, and after an acquisition to make it a success.
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      Opportunities for growth
      While some years see more activity than others, acquisitions are a constant in the business world. For instance, megadeals dominated in recent years, only to see a slowdown in 2020 during the pandemic and recession. Regardless of the pace, acquisitions consistently remain a consideration for financially-stable companies searching for a way to meet investors’ demands for growth.
      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, including with a new product or in other countries where establishing new locations is difficult. An acquisition can also allow a company to ultimately make its operations or processes more efficient, saving money in the long run.
      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, and that the timing is right.
      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 opportunities when organic growth is 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. It can also be the case when economic factors create what seem like unique acquisition opportunities, during a time when those windows of opportunities open and close quickly.
      Directors need to recognize these different drivers. And they need to hear the 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. The board should understand the broader economic trends in the industry, including who is doing deals, and who might be facing distress. That allows directors to understand where their company fits within the wider scope, and how to understand their own strategy.
      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 company’s established strategy, or is the first step in a new strategic direction. 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 sometimes 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.
      For companies without a track record in acquisitions, board involvement can be even more important. The acquisition may be a departure from the company’s established strategy, meant to take advantage of a unique opportunity. In that case, many members of management will likely be new to the acquisition process as well, and involving the board early can help bring critical skills to the table as the deal is negotiated.
      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.
      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, or underfunding certain parts of the organization, to the presence of activist investors. A target’s environmental record has also become increasingly important.
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        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 vulnerabilities to an existing enterprise. Yet many companies don’t invest appropriate resources to analyzing cybersecurity during the deal process. As a result, sometimes a massive data breach at an acquisition target comes to light before the acquisition closes, and can be an issue in finalizing the deal.
        The business environment created by COVID-19 may shift or magnify these risks. Due diligence is more difficult to execute, and some company issues become harder to spot or address, particularly with many employees working remotely.
        Depending on the risks, the board may want to discuss whether the target still should be acquired or whether another type of deal structure makes more sense. For example, in some circumstances, a joint venture or an alliance could be a better way to unlock value.
        Look for culture clashes
        The due diligence phase is also a time for directors to raise the issue of culture. Ideally, the board should confirm that management is considering how the two cultures align, and how they can be integrated. Never a simple task, it becomes even more difficult in the COVID-19 environment. Company culture is harder to define or assess when employees are working remotely, and harder to influence when employees are not gathering together in a workplace.
        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 organizations 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 themselves need to be sure the deal is right for the company before approving it.
        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.
        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.
        These can be sensitive decisions, particularly during times of high unemployment and economic uncertainty. From the company’s perspective, layoffs will impact employee morale, while failure to address redundancies can create long-term consequences.
        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, and take into account things like their remote work and employee protection policies.
        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.
        The business environment created by COVID-19 may shift or even magnify all of these risks. Due diligence is more difficult to execute, and some company issues become harder to spot or address, particularly with many employees working remotely.
        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, knowing the plan can boost the team’s motivation.
        Management should consider all communication angles—not just financial metrics, but how the investment will impact the company in areas such 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.
        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.
        The board should also take a look at itself post-acquisition. Some companies benefit by changing their board makeup after large or transformational deals.
        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.
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