Staying ahead of the game

More mergers and acquisitions signal an active year for smart boards looking to capitalise on market uncertainty, writes Kath Walters.

Despite the wheel spinning in Canberra, and rapid-fire state government turnover in Victoria and Queensland, it is still a good time for boards to consider mergers and acquisitions (M&A) opportunities, especially in the resources sector.

Boards have been deterred by political uncertainty, with new figures reported by The Australian newspaper showing announced deals in the year to date have fallen from 175 last year to 130 this year, with completed deals down from 140 to 63.

Smart boards, however, will be looking out for M&A prospects. There is plentiful cheap debt available and many companies are in good shape after a few years of debt reduction and cost cutting.

Getting M&A deals right, however, is very tough. Wesfarmers’ superbly executed 2007 acquisition of Coles shows just how much value this kind of deal can deliver. Wesfarmers’ share price has risen from AUD 26 per share since the deal to AUD 41 per share in early 2015. Unfortunately, the result of mergers is often not greater than the sum of the parts.

Focusing on culture is the key. In many companies, hours, weeks and even years are lost in internal disputes over who is doing what role, who is sitting in what desk and even what the newly-formed company is going to be called. Strategy and culture, led by the board, is never more crucial than during an M&A deal. Boards that bring crystal clarity to these two elements are the most successful.

“The board sets the scene,” says Helga Svendsen, a non-executive director at the YMCA, and founder of Board Kickstarter, a program to coach aspiring board directors. Svendsen recalls a deal within the not-for-profit sector, nominally a merger but in fact, an acquisition.

“A part of the organisation thought they had decision-making capability, but they did not,” Svendsen says. “That led to staff feeling insecure and concerned about what was going on. Some left, but the problem was not so much staff turnover as time lost.”

No time for self-interest

M&A deals bring the true role of the board – to serve its shareholders – into stark focus. There is no room for self-interest. After any M&A deal there will, of course, be only one of each executive role, one board chair and even if the board is expanded, some directors will probably need to resign. Directors cannot be too precious about their own roles.

Boards that have developed a culture of renewal are more accustomed to that kind of focus. At the YMCA, directors can only serve two terms of three years before handing on their role. Svendsen, who is in favour of fixed terms for boards of between six and 10 years, says this fosters regeneration and renewal. “You provide your wisdom and input into strategy and vision, and then hand it on to the next generation,” she says. “It’s not a position for life.”

Timing and risk

Timing is a critical factor in M&A deals and the domain of the directors in their role in identifying and mitigating risks.

Rushing through due diligence can lead to culture clashes. However, going too slow can be just as dangerous; opportunities are lost, or the parties involved spend too long in unproductive uncertainty.

Since the directors play a big role in this kind of deal – meeting more often with the CEO and executive team, briefing media and possibly communicating with staff about the vision and purpose behind the deal – the line between the governance and operational role becomes harder than usual to manage. Directors cannot be too hands off. It’s crucial that the board steps up into the role of thinking through all the risks, supervising due diligence and supporting the executive and CEO, planning the smooth integration of the merged organisation, even if they will no longer have a role in it.

Something will go wrong. Svendsen says she aims to think through every possible problem, how to mitigate it, and then to be pleasantly surprised if one of the anticipated problems does not eventuate.

Perhaps the most dangerous outcome for a board is when a deal falls over at the last minute, as it did for Qantas in 2006 when the board accepted a bid that was later overturned by shareholders. As horrible a prospect as that is, the board must decide what is in the best interest of shareholders and act on their behalf. Inaction is just as risky as action.