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M&A Policy: A Board Responsibility

M&A Policy:
A Board Responsibility

Directors Monthly The official Newsletter of the National Association of Corporate Directors
Vol. 22, No 7
July 1998

By Diane C. Harris
Hypotenuse Enterprises, Inc.
Rochester, New York

Does your company have a policy for mergers and acquisitions? This article can be a blueprint for setting one.

In a survey we did of Fortune 300 companies, we asked the question, “Is there a formal acquisition policy in your company?" Nearly half of the respondents said no—a rather shocking number, when you consider the widely cited statistics that only one deal in five lives up to or exceeds original expectations.

In times of crisis, such as an unsolicited takeover offer, or the pressure of a seemingly attractive property in a short-fuse auction situation, it is just too late to develop the policies and controls that should have been enacted earlier. It is the board of directors’ responsibility to see that appropriate policies and controls are in place before a bear hug occurs, before shark repellent is needed, before poison pills are swallowed. And the dealmaking policies should not only encompass the obvious areas of mergers, acquisitions and divestitures, but also licensing, joint ventures, and other external growth structures (collectively “corporate development policy” or CDP).

Each board member should ensure that CDP is adequate and on balance, to protect shareholder value, the rights of all constituencies, and the viability of the corporation.

There are three major areas for CDP focus: board prerogatives, clarification of management responsibilities (including organizational process, procedures, and methods), and controls.

Board Prerogatives

Board prerogatives are those decisions and rights the board chooses to reserve to itself, usually some or all of the following:

bulletStrategic plan approval. Most boards require a presentation by management on the strategic plan and approval by the board. The strategic plan is then a driver for all subsequent mergers, acquisitions, and divestitures activities. Usually external growth strategies should be consistent with the strategic plan and any inconsistent activities should be first elevated for board approval.
bulletDeal size hurdles. Most board policies specify a transaction level or size, e.g., a dollar amount, at which the board wants to review and approve. Some boards require that any use of company stock also come for approval. Generally, the larger the company, the higher the level of transaction before it goes to the board. We have seen policy levels as low as zero or as high as $20 million.
bulletSale of company assets. Many boards are relatively lenient about M&A fishing expeditions by management, but may be very restrictive on allowing management to explore the sale of any company assets without the board’s approval. One client company has a policy that calls for dismissal of anyone who discusses the sale of company assets without having first received the board’s approval. Sometimes such policies are qualified as only applying to the sale of five percent or more of the company. Such a policy reduces a company’s risk that a discussion with another company might result in a negative impact to one of its own businesses, or might attract an unwanted offer on the whole company.
bulletReporting of inquiries. The policy prohibition against selling assets is often complemented by a policy requiring that all inquiries concerning significant transactions (including potential divestitures) be reported promptly to the board of directors. A board with this policy is unlikely to be surprised by an unwanted offer. Also, keeping a file of detailed information on such inquiries provides a database of interested parties for future divestitures.
bulletOpinion letters. Many boards decide case by case whether to require investment banking valuation opinion letters before buying or selling an asset. Board policy in some cases sets the level at which opinion letters will be required, often around the $50 million mark for companies of about $1 billion in size. It is best practice for the board to decide, in advance, the transaction size at which an opinion letter would be required, perhaps adding the language that all management buyouts will require a valuation opinion letter.
bulletTakeover defense. Boards also must decide what antitakeover protection will be put in place, if any, such as staggered boards, poison pills, golden parachutes, or change of incorporation.
bulletOther. Some boards will set other policies such as whether or not stock may be used in deals, what are acceptable dilution ratios, which valuation methods will be required, limits on investment banking fees, or requirements for post-deal audits. Sometimes such details are found in detailed procedures and methods.


Supplementing the board prerogatives, management policies usually focus on three areas:

Organizational policies must reflect the board policies, and clarify the responsibilities of officers and other members of management. The CDP will necessarily repeat the elements of board prerogatives in order to ensure that employee’s actions are consistent with board policy company-wide. For example, if management does not disseminate the policy that says all unsolicited divestiture inquiries must he reported promptly to the board, how will employees know to do so. Further, management may want to set forth its own directives on how an employee should reply to an unsolicited inquiry.

Additionally, management policies should reflect the approval processes below board level. For example, will there be an internal management or operating committee to review all transactions, even those not submitted to the board? How often will it meet? How will an employee post an item to the agenda?

Management policies will cover such issues as:

bulletWhen should deviations from strategy be elevated? To whom?
bulletWho will be empowered to contact prospective partners?
bulletWho will negotiate, and will there be a “qualified negotiator” concept?
bulletWho will sign off on valuation?
bulletWho will approve letters of intent?
bulletWho will approve investment banking fees?
bulletWho will sign contracts?
bulletWho will approve deal structuring?
bulletWill there be an internal champion system?
bulletWhen will the board of directors’ approvals be woven into the process?
bulletHow will submission be made to a management committee, and at what stage of the deal?

Policy and process must also be reduced to procedures and methods, clarifying who will be responsible for approving, administering, and changing the CDP. If a company is expecting to do a number of transactions, either for growth or restructuring, it needs process, procedures, and methods in order to coordinate activities, ensure consistency, and to streamline an otherwise “red tape” activity. Clarifying the process can help dealmakers hone their skills and provide additional guidance and training. Kinds of procedures include formats for presentation for approvals/signoffs, valuation methods, due diligence checklists, and formats for confidentiality agreements and fee agreements.


Having a sound CDP in place is necessary, but not sufficient. Rules don’t ensure compliance, controls do. The board can ensure the controls are in place by doing most or all of the following:

bulletAsk to see all written policies and procedures concerning development.
bulletInsist on early postings from management instead of waiting for a well-rehearsed final presentation. The board should give early feedback and not wait until the train has so much momentum that it can hardly be stopped.

In reality, a board faced with any crisis begins to deal with the issue long before the crisis, when the decision was first made to have or not to have policies, procedures, and controls in place.

bulletUse questioning designed to bring out the strength or weakness of the underlying strategy system. For example, one powerful question is “What alternative strategies did you reject before making this recommendation?” If management didn’t reject anything else, one has to wonder about the depth of analysis. If management isn’t willing to talk about alternatives rejected, one has to worry about the openness of management. Also, the board should ask, “If this transaction is not approved, what will you do?” further spotlighting weaknesses in strategic planning.
bulletRequire a champion for every deal, i.e., a member of top management who will stand up in front of the board of directors and affirm, "I am responsible; I will get the job done.” Personal responsibility is key to successful controls— and to successful deals.
bulletUse the post-deal audit—at least at the six-month, one-year, and two-year points—to make sure that results track commitment.

In reality, a board faced with any crisis begins to deal with the issue long before the crisis, when the decision was first made to have or not to have policies, procedures, and controls in place. It is much easier for a board to prevent, or at least deal with such crisis in a company with a well-thought-out CDP.

For example, in an unsolicited takeover attempt, having appropriate policies, procedures, and controls will help to determine:

bulletif a price is adequate, based on a well-reviewed strategic plan and the company’s own valuation methodology
bulletwhether all realistic alternatives have been considered, drawing on the experience of many presentations, of alternatives discussed, of understanding the strategic options, and
bulletwhether the company should stay independent, based on the company’s own growth opportunities, strengths, management drive, and alternatives.

Developing a CDP

Who should lead the drive for adequate policy on mergers, acquisitions, and divestitures? The survey we did of Fortune 300 companies with a CDP showed that the corporate development department usually develops and administers a CDP. The corporate development officer should lead the charge for a CDP, but he or she need not write the policy. A neutral party can stay above politicizing the process and can benchmark a wider industry base of practice, thus allowing the corporate development officer to concentrate more fully on executing the external growth strategies of the company. Whether the CDP is written internally or outsourced, the corporate development officer plays a key role in assisting the board to meet its responsibilities in the M&A arena.

Diane Harris is president of Hypotenuse Enterprises, Inc., an M&A advisory and consulting firm she formed. Services provided by the Rochester New York-based company include development of M&A policies for various sized companies. Prior to forming her own company, she was vice president of corporate development for more than a decade at Bausch & Lomb, Inc., where she created and launched the company's mergers and acquisitions program. Harris is a director of Flowserve Corporation and president of the Association for Corporate Growth. This article is reprinted from M&A Today (Vol. 6, No. 10, October l997, and based on a speech delivered to the 1997 Corporate Directors’ Summit in Toronto last September.


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