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M&A: The Role of the Board

mergers and acquisitions

The board of directors is responsible for overseeing the goals and strategy of a company. The board does this by hiring a Chief Executive Officer and perhaps some of the other C-level executives, and by establishing the high level objectives of the company. The management team then executes or manages that strategy by handling the day-to-day operations. Of course, overseeing business strategy includes wide-ranging duties and obligations, with some boards taking a more active role in their companies’ operations than others. In addition, the scope or nature of a decision or transaction often affects whether and to what extent the board will be involved. High risk, high value transactions, such as mergers and acquisitions (M&A), clearly require extensive involvement from the board. Here is the role most boards will play during M&A:

Determine Strategy

Given the importance of the board’s role in the overall direction and business strategy of a company, the directors will play an active part in determining strategy of any potential merger or acquisition. The decision to merge with or acquire another entity can have enormous repercussions. As a result, the board will have to ensure that it is a valuable deal worth pursuing and that the company has the resources and people-power that it will need to close the deal. Of course, integrating two entities can be rather challenging, so the board will also want to ensure that the company has the right management team in place with the requisite skills and qualifications.

Assess Risk

The board must make decisions on a daily basis that can create substantial risk to the company. Merging with or acquiring another entity can no doubt be a risky endeavor, the consequences of which can be quite dire. For this reason, the board will be responsible for assessing the potential risk associated with such a merger or acquisition. Obviously, there are many deals that will be worth the risk, and it is the board’s duty to assess each deal as objectively as possible to ensure that it abides by its duties of loyalty and care.

Evaluate Deal Terms

Assuming that the board is comfortable with the goals and objectives of a prospective deal and is willing to accept the risks inherent in it, the board must also evaluate the proposed deal terms. The board will no doubt want to scrutinize every provision, but especially those related to price, stock exchanges, leadership choices, and employment matters. It can be quite difficult to change the terms of a deal once things begin to move forward, so the board will want to ensure that the deal selected is the best opportunity available.

Maximize Stockholder Value

The board of directors has a duty of loyalty and care to the corporation as a whole, and an important facet of that duty is to maximize stockholder value. For companies that are considering a sale of their business, it will be important for the board to ascertain whether the stockholders will be best served by a sale at that particular time in light of the economic climate and circumstances. This analysis can be quite difficult given how quickly financial conditions can change, and a bad decision can lead to costly and time-consuming litigation if the company’s value is massively jeopardized.

Seek Professional Input

Although the board should make sound judgments on the basis of concrete facts and figures, to avoid questions of impropriety, it is always wise to seek a fairness opinion from a neutral party. An external financial advisor should assess the proposed transaction along with the criteria the board used to determine whether it wished to pursue the particular deal and provide an unbiased opinion regarding the validity and value of the merger or acquisition. This can bolster or perhaps undermine the board’s decision, but it helps demonstrate the board’s commitment to acting in the best interest of the company.

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