by Diane C.
Editor’s Note: The following article is a result of a speech given by
Diane Harris to the 1997 Corporate Directors’ Summit in Toronto on
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
“Corporate Development Policy” or CDP).
member should ensure that CDP is adequate, on balance, to protect
shareholder value, the rights of all constituencies and the viability of
There are three
major areas for CDP focus: board prerogatives, clarification of management
responsibilities (including organizational process, procedures and
methods), and controls.
Prerogatives -are those decisions and
rights the board chooses to reserve to itself, usually some or all of the
Strategic 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.
2) Deal size
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.
Sale of company assets -
many boards are relatively
lenient about management’s exploring acquisitions, 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 5% 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.
the policy prohibition
against selling assets is often complemented by a policy requiring that
all divestiture inquiries be reported to the board of directors
promptly. 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
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.
also must decide what anti-takeover protection will be put in place, if
any, such as staggered boards, poison pills, golden parachutes, change
of incorporation, or defense retainers.
7) Other -
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.
“Clarifying the process can
help dealmakers hone their
of management’s responsibilities - refers to
the policies used to enforce board policies, and to ensure appropriate
organizational processes, procedures and methods are in place.
Supplementing the board prerogatives, management policies usually focus on
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
company-wide. For example, if a management does not disseminate the policy
requiring all unsolicited divestiture inquiries be reported to the
board, how will employees know to whom to report the information and how
promptly? Further, management may want to set forth its own directives on
how an employee should reply to an unsolicited inquiry.
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
policies will cover such issues as:
• When should
deviations from strategy be elevated? To whom?
• Who will be
empowered to contact prospective partners?
• Who will
negotiate, and will there be a “qualified negotiator” concept?
• Who will
sign off on valuation?
• Who will
approve letters of intent?
• Who will
approve investment banking fees?
• Who will
• Who will
approve deal structuring?
• Will there
be an internal champion system?
• When will
the board of directors’ approvals be woven into the process?
• How will
submission be made to a management committee, and at what stage of the
3) 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, assure 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 appropriate policy,
and controls will help to
determine whether all
realistic alternatives have been
directors have a right to expect that the finished work they see in formal
presentations is based on healthy policy and practice, that functions well
and consistently, not that each case is handled on an ad-hoc basis.
however, having sound CDP in place is necessary, but not sufficient.
Rules don’t ensure compliance, controls do. And the board needs to
assure itself that the controls are also in place by doing most or all of
Ask to see the written policies and procedures that assure key
policies are appropriately implemented.
2) Insist on
early postings from management instead of waiting for a well-rehearsed
final presentation. The board’s responsibility, then, is to give
early feedback and not wait until the train has so much momentum that it
can hardly be stopped.
Use 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
Require 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
Use 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
For example, in
an unsolicited takeover attempt, having appropriate policy, procedures
and controls will help to determine:
• if a price
is adequate, based on a well-reviewed strategic plan and the company’s
own valuation methodology;
• whether all
realistic alternatives have been considered, drawing on the experience of
many presentations, of alternatives discussed, of understanding the
• whether the
company should stay independent, based on the company’s own growth
opportunities, strengths, management drive, and alternatives.
With the right
fundamental CDP in place, the board will be best equipped to deal with a
crisis or an unsolicited offer. Having thought through its own policies in
a less turbulent time, the board is then free, when most needed, to bring
its whole focus to optimizing shareholder value.
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.
Our experience is that the Corporate Development Officer is well-advised
to proactively 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 whose services include development of M&A
policies for various sized companies (716-473-7799).