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Hot Topics in Mergers & Acquisitions

Six Considerations for Boards

September 23, 2014

Fourth Quarter 2013
Corporate Board Member
by Deborah Scally

While M&A has not yet rebounded to its heyday level of 2007, there are positive signs for deal making at the midway mark of the year. According to Mergermarket, deal values are inching upward on a year-over-year comparison basis as of H1 2013, and many observers believe the current conditions will provide an impetus for more transactions by the end of the year and into 2014.

In many of the deals currently taking place, the stock prices of both companies are being rewarded, which should strike a happy chord for companies that have been sitting on the sidelines.

Moreover, key indicators demonstrating a relatively steady GDP and a calmer regulatory arena are helping to fuel a more stable domestic environment overall. Generally speaking, these key indicators are exactly what strategic buyers and sellers are seeking in todays risk-averse marketplace. Still, the flags are mostly yellow, observers say, as the aftereffects of 2008 havent dulled and some of the more recent macro shocks–the fiscal cliff, the Cyprus crisis, the recession in Europe, health care reform–have kept corporate executives on the edge, waiting until its safer to emerge and take a seat at the deal table.

In todays environment, you cant emphasize enough the impact of CEO confidence as a chief driver for M&A activity, says Steve Baronoff, global head of M&A, Bank of America Merrill Lynch. Baronoff sat down with Corporate Board Member recently and discussed six key issues corporate boards ought to be considering as the markets for strategic acquisitions begin to create more space and opportunities for growth-minded companies.

  1. Monitor the Environment
    Most observers concur that on balance, mid-year 2013 conditions are favorable for a rebound in M&A, but to ensure boards and management are comfortable with this assessment, they should be vigilant in tracking key economic indices themselves, Baronoff asserts. For example, the Conference Boards Leading Economic Index (LEI), a composite index of 10 indicators designed to predict economic activity six to nine months ahead, takes into consideration such things as new orders for consumer goods, stock prices of the S&P 500, building permits, unemployment claims, and other measurable data points that have a dramatic impact on the stability and forward growth of the macroeconomy. According to Baronoff, monitoring economic indicators can help boards reach the necessary comfort level that both the timing and market conditions are right to consider an M&A transaction.
  2. Proactively Identify Targets
    It is also important to determine as a board, well in advance of any outward overtures, which types of targets make sense strategically, says Baronoff, emphasizing the importance of not simply being in a reactive position relative to a potential deal. “Boards should have a definite view of what would be a good deal, what would be a good area to invest in where they are trying to grow, so that they have their own independent view of what type of company and sector they want to buy in,” he advises. Investing the boards time ahead of a potential deal will be much more efficient and allow for better decisions when a target is actually in play, Baronoff says.
  3. Understand the Gaps in Your Own Business
    One of the most important aspects of thinking through an M&A strategy is simply putting the puzzle pieces together and seeing where there are logical synergies or holes to fill. There are a variety of ways these situations can be addressed, suggests Baronoff—be it with additional capital spending, organic growth, or by acquisition. Whether the gaps involve a lack of geographic footprint in a new region, a need for greater workforce expertise, or a desire to build economies of scale, having a clear understanding of the missing pieces will allow the board to more definitely identify the right solution.
  4. Know Your Own Value
    Boards and management need to have a clear understanding of what the various pieces of their businesses are already worth. Some companies are just in one business, but a lot of companies are in multiple businesses, which makes this exercise even more compelling.

    “Rather than wait for a buyer to come up and say, ‘The sum of the parts is worth more than the whole,” he explains, “the board should have concrete information about that value, proactively, on its own. It ought to have a view of the various parts of the business and how they fit together.” This becomes an especially critical point when or if a shareholder suit arises, he notes. Its important to remember that directors are protected by the business judgment rule standard, so long as they act in good faith in making an informed decision. Thus, says Baronoff, “they ought to be prepared and have that understanding in advance.”

  5. Compare an acquisition against other uses of capital
    One of the most compelling dynamics in play in the current environment is the abundance of cash that is available for deployment. According to the latest data reported by the Federal Reserve, total liquid assets held by nonfinancial companies totaled $1.8 trillion as of September 2013, a sizeable amount that could pave the way for a significant uptick in M&A. In fact, a second-quarter study published by Deloitte shows CFOs believe growth to be the most predominant use of cash over the next year, with lesser focus on further efficiency gains and financial risk mitigation. Moreover, nearly half (49%) of CFOs surveyed by Deloitte would invest to acquire businesses as one of their top three uses for capital in 2013.

    Companies with excess capital considering M&A have a host of decisions, not the least of which is determining how the purchase of a particular asset will make the existing business more valuable. Baronoff says there are many capital deployment options that should be studied before deciding that an acquisition is the optimal course of action. “How does it compare to increasing the dividend? How does it compare to buying back stock? How does it compare to capital spending?” he says. “The best boards and companies are doing a mix of all that activity, and they ought to have a good understanding of the tradeoffs.”

  6. Understand the Activist Investor Base
    A wild card in the decision tree regarding optimizing capital deployment and potential M&A is the possibility for upheaval from the relatively new breed of activist investor, many of whom wont hesitate to step in and take the bull by the horns, cautions Baronoff. “In this environment, you are seeing companies of all sizes being scrutinized by activist investors,” he says, advising that boards should understand the perception that these investors may have of the company. Some of those perceptions are valid, others are not, but either way, boards have to be ready to react if this new investor base steps up to the plate, he says.


Taking into account these six critical areas will help ensure the board is prepared to make the best decisions possible for all shareholders in the current environment. CEO confidence is beginning to return, yet most boards and management are still risk averse, having taken to heart the lessons learned post-2008. Even so, most observers are optimistic about a gradual rebound in M&A activity, given that financing is attractive, cash is plentiful, and the market is rewarding players on both sides of the deal table. Management and boards that spend the appropriate amount of time with the six considerations above, therefore, will be in the best position to act responsibly with regard to the opportunities ahead.