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.
