Opposing Mergers: The Silent Minority

Directors of acquiring companies rarely speak out against a proposed deal. But with M&A activity heating up and CEOs anxious to buy growth, they may have to.

With his company’s organic growth prospects diminished because of the pandemic, the CEO felt pressure to do something big. A deal wasn’t in the strategic plan, but he pitched to the board that now was the time to go after a long-coveted acquisition. It was convincing enough to get the green light from most of the directors. But not all of them.

While it is rare for board directors of acquiring companies to object to a proposed deal, it does happen. Usually it occurs when the potential transaction is undertaken amid an uncertain financial landscape or in an environment that presents unfamiliar integration obstacles, like the one businesses are operating in now. And with experts predicting that the rollout of COVID-19 vaccinations, the beginning of a new administration in the United States, and a strong stock market will cause leaders of cash-rich companies to go on a buying spree this year, there’s a good chance some directors may find themselves trying to temper, if not fight back against, their CEOs’ urge to merge.

It isn’t an easy or comfortable situation for a director of an acquiring company to be in, says Stephen Bainbridge, a UCLA law professor who specializes in mergers and acquisitions. After all, the board hired the CEO precisely to make these kinds of decisions. “You don’t want to be seen as bucking the CEO,” says Bainbridge. “There’s a lot of peer pressure in the boardroom, and most of the time, even if they object, they will go along to get along.”

Practically speaking, there isn’t much risk to that philosophy—acquiring company directors face even lower liability risk than target company directors, with shareholders hardly ever filing lawsuits against them for approving a deal that turned out badly. There’s also an element of self-preservation, as board directors who oppose a merger can lose their seats when the merged firms create a new board composition.

Still, experts say directors of acquiring companies have as much fiduciary duty to their shareholders as those of target companies, and the current environment presents real questions around such issues as conducting proper due diligence, evaluating management teams, and inspecting operations and facilities, all of which now has to be done virtually, says Shane Goodwin, associate dean of Southern Methodist University’s Cox School of Business. “It’s not like you can go fly to canvass a potential acquisitions’ international operations,” he says.

To be sure, 86% of directors responding to a recent National Association of Corporate Directors poll say that the pandemic has affected their ability to pursue, finance, and close M&A deals. Among the risks cited by directors are overpaying, achieving growth and financial projections, and properly evaluating culture and reputation. As a result, more than one-third of directors responding to the poll believe their boards will have to change their M&A oversight processes.

“Successful mergers and acquisitions are tricky in any environment, and are especially difficult if not impossible to achieve in a COVID world,” says Chad Astmann, a Korn Ferry senior client partner and the firm’s global cohead of investment management. Still, he says, with CEOs seeking to buy growth at all costs, the deal environment is likely to stay very active this year. “There is no shortage of capital and energy to chase properties.”

Cheap debt is also in abundance, and buying companies on credit is an intoxicant that historically has been hard for leaders to resist. But borrowing an excess of debt could not only detract from the financial rationale for a deal but also the company’s balance sheet for years to come. As Goodwin notes, value creation isn’t in the deal itself but in successfully integrating the two companies. “If that fails, the deal will never achieve its potential growth,” he says.

That makes it all the more important, say experts, for acquiring company directors to exercise fiscal prudence and strategic oversight. Dennis Carey, a Korn Ferry vice chairman and coleader of board services for the firm, suggests boards of acquiring companies follow the Warren Buffett approach to deal decisions. When considering a potential merger or acquisition, the famous investor divides his board into two teams of directors, each aided by an investment banker. One team argues in favor of the deal, the other against. “Whether to move forward or not is decided by the better of the opposing arguments,” says Carey, who coauthored a recent book on how boards are redefining total shareholder return that features an interview with Buffett. He says this method has the advantage of letting directors raise concerns and ask hard questions without being confrontational, and curbs the potential for lobbying other directors one way or another outside of official channels, in Zoom breakout rooms, or in proverbial virtual hallways. “Once decided, that’s it, there’s no end runs,” says Carey.

To be sure, the goal for any acquiring company director, says Goodwin, isn’t to rubber-stamp a deal or stop one from occurring. Rather, particularly in a time of crisis, it is to make sure their house is in order before they buy someone else’s. Or, as he puts it, “When thinking about deals, you don’t want a board full of risk-takers or directors that are risk averse.”