M&A and the roles of the Board

Mergers & Acquisitions (M&A) is one key channel that could help any organization expand business base and scope. Over the years, numerous global companies used M&A as a mean to expand business locally and overseas. Therefore, the total value of M&A deals in the world rose continuously and perhaps became one key condition in economic development.

According to a research note “Global M&A deals…to resume growth post COVID-19” by the Business Research Department at the Export-Import Bank of Thailand (EXIM BANK), value of M&A deals in 2020 was adversely affected by COVID-19 pandemic. The outbreak urged many companies to put off their investments to reassess situation and adjust their strategies to changing business landscape. Meanwhile, companies are also seeking new opportunities and new targets with long-term potential, implying that M&A deals will resume growth after the viral situation is resolved.

M&A deals in Thailand tend to be in the form of overseas expansion, aiming mainly to address market size limitation, labor shortage, and outdated technologies. In 2019, value of Cross Border M&A in Thailand surged 33% on year, up from 17% increase in 2015, while average deal value was also larger. According to Phatra Capital, local M&A deals in Thailand in 2019 were approximately US$15 billion, or Bt480bn. Deals in the financial sector accounted for around 50% of the total value, followed by utilities at about 20%.

The statistics above reflected how M&A has become normal practices that many organizations conducted and emphasized on. Given associated risks and uncertainties at present, the Board must have clear vision and comprehensive understanding about M&A in order to prepare for expansion of business base and scope. As organization leaders, the Board must also ensure business sustainability and enhance benefits of stakeholders despite adverse effects from M&A threats.

While the pandemic has yet to resolve, the Board should take proactive stance and stand ready for potential deals by adhering to the following M&A oversight framework:

1. Creating a deal-making mindset

Many deals started out with just a simple phone call. This will not be a problem for experienced Board who stands ready to tackle the proposed deal instantly. They may start by analyzing if the deal fits with the company’s strategies and plans. To ensure the Board is properly prepared, some companies even have laid out clear standard procedures for the Board to cope with M&A. Some have established M&A Committee to particularly handle M&A issues as well as stimulate and challenge the Management on the M&A feasibility. Directors assigned for this task must have expertise and able to determine value and synergy from the proposed deal so that they can offer straight-to-the-point advice to the Management.

Therefore, appropriate Board component, structure, and procedures will create the right mindset in contemplating M&A deals.

2. Seeing the bigger picture

While the Management and consultants may be too busy with the deal that they overlook the big picture of M&A process, it is the Board’s role to see the overall picture that includes economic, regulatory, business and social environment aspects to ensure the deal fits with the context at that particular time. The Board should also stimulate constant reassessment of risks and opportunities to ensure that the company can make timely adjustment to its strategies and plans in accordance with changing situations.

3. Staging deals with maximum precision

The Board must supervise and provide guidance to the Management in every step of the M&A process as shown in the diagram below to ensure that all procedures are carried out in accordance with plan.

1) Strategy fit review
The Board should be independence and lead to open discussion with the Management to jointly analyze the deal and conduct strategy fit review. It should also ask questions about benefits that the company will reap from the deal. Moreover, the Board should assess if assumptions used in the feasibility of the M&A deal is rational and assess potential impact on the company’s long-term strategies.

2) Risk analysis
The Board should govern and conduct risk analysis for M&A deal together with the Management. The analysis should cover risks from individuals (i.e. lack of M&A understanding, lack of appropriate due diligence etc.), risks from relevant rules and regulations, and risks from integration process. Should there be any issue from the risks listed above, the Board must consider ways to resolve them and help the company achieve strategic targets in timely manner. The Board must also communicate with affected stakeholders on a regular basis. Most importantly, the Board must reiterate that any attempt to mitigate risks or resolve issues will always base on business ethical ground and any impact on relevant counterparties will be weighed fairly.

3) Due diligence
The Board should take part in governing due diligence by ensuring that the Management report to the Board the scope, timeframe, and required resources for the due diligence as well as the result. However, the Board must ensure that the due diligence does not focus solely on financial risk but take into consideration other non-financial matters such as trade, operation, compliance, tax management, human resource administration and employees’ benefits, environmental, social, and governance impact management etc.

4) Deal structure and pricing
The Board must be extra careful on issues concerning financial. It must consider whether the M&A deal worth the investment, who should set the price? what is the appropriate price? will the pricing have financial impact on the company? why does the company should merge?, can it be done in the form of a joint venture or other method? etc. These are issues that the Board and Management must figure out together in order to decide whether it would go ahead with the deal.

5) Integration
Before the Board gives a green light to M&A deal, it has to thoroughly contemplate the integration plan, taking into account issues like merger timeframe, completion schedule, responsible persons for these steps, compatibility of corporate cultures etc. The Board should also be informed about integration progress on a regular basis.

6) Post-integration analysis
The Board should require post-integration analysis. This step should be prepared since the negotiation stage to pave way for resolving issues that may occur after the integration. Most importantly, it will be lesson learnt for future M&A deals.

4. Confronting litigation involving M&As

The Board should bear in mind that it can be sued if it fails to perform duty of care in issues like conflict of interest or lack of disclosure. The latter may include information relevant to investors such as details about the negotiation, agreement, and transactions. Disclosure of these information must be carefully disclosed with accuracy, completion, timely, and distribute to all investors adequately and fairly. Information concerning sensitive issues like hostile and friendly takeovers must also be handled with discretion. Other crucial issues may involve failure of previous Board and Management before the M&A while the new Board and Management may fail to achieve targets set for the acquired companies. Since the Board will be held accountable, directors should remind themselves to perform their duties with care and ensure that each and every step of the M&A is legitimate and appropriate.

While M&A can help the company enjoy leaping growth and generate greater shareholders’ return, M&A deals that does not comply with principle or was conducted without care could jeopardize the company, shareholders, and stakeholders altogether. Therefore, the Board must govern and collaborate fully with the Management. Complying with the four M&A oversight framework mentioned above means the M&A deal stands a fair chance of success.

Ratanapat Yaowabut
Senior CG Specialist
Thai Institute of Directors Association

Source
‘Merger’ a strategy that drive leaping growth, September 24, 2020, Krungthep Thurakij https://www.bangkokbiznews.com/news/detail/877792

An M&A Oversight Framework for Boards, Professor Didier Cossinwith Abraham Hongze Lu, IMD Global Board Center
https://www.imd.org/research-knowledge/articles/MAOversightFramework/

Global M&A deals…to resume growth post COVID-19, August 10, 2020, Business Research Department, The Export-Import Bank of Thailand (EXIM BANK)
https://kmc.exim.go.th/detail/20180726114014/20200811083923