The pace of corporate mergers just keeps on accelerating, but often directors face a "bet the company" merger decision with too little time, facts, or advice to make a fully informed call. More and more mergers are not only failing to create value, but are in fact destroying value, often with hidden skeletons in the closet that closer inquiry could have revealed. What issues and questions should directors be raising (and what closets should they be peeking into) before it's too late?
"Due diligence is an ongoing problem" observes Robert Rogowski, principal at Columbia Financial Advisors. "It's been sloppy in many cases, and companies don't get good information on risk." Overzealous estimates of costs saved or revenues enhanced should also be closely challenged.
A good board question for the company's due diligence team: What are the five greatest downside risks of this transaction, both between announcement and close, and after the close?
Then follow up with the question: How will you protect against those risks in both time periods?
Ask about talent retention on both sides: Have you structured the transaction to provide the right incentives for target talent to stay and prosper? How can we prevent an exodus? Perhaps the biggest bump in the merger road taken by DaimlerChrysler over the past year has been the flight of rising talent on the Chrysler side.
Focus on the specific liabilities of the company you're marrying into, advises Rogowski. "In oil it's the environment; in services, it's retention of repeat customers; in manufacturing, warranties and product liability. Each business can surprise you." The farther outside your company's areas of expertise you roam for mergers, the greater the risk of being blindsided.
The biggest board failure in reviewing mergers, says Robert Apgood, president of Canterbury Group consultants: Valuation. "They don't know what price they should really pay, they don't get a sound value for the company, and they don't know why they really want to buy it."
Mark Sirower, a noted academic thinker on merger issues, and now a consultant with the Boston Group, sees boards too eager to avoid losing a deal even as the price inflates. "Set a firm price and stick to it - are you willing to walk away?" Sirower warns of a "last man standing" mentality that pushes companies to make deals just to keep from being left behind in the rush of consolidation. "This leads to a lot of wacky mergers." Be willing to say no. There will always be more opportunities.