Although deal activity during 2022 and early 2023 has slowed compared to a record-setting 2021, many companies are assessing their options for M&A to drive growth and increase resilience. At the same time, a range of evolving challenges including macroeconomic volatility, regulatory pressures and heightened scrutiny from shareholders and other stakeholders may increase uncertainty around deal success. BDO’s Amy Rojik tells us what to expect through the end of the year.
While it’s difficult to predict what lies ahead for global deal activity, preparation remains critical to capturing opportunities. Boards should assess potential risk and require a clear investment thesis and proactive integration plan from management to realize expected synergies across the deal lifecycle.
According to the Spring 2023 BDO Board Pulse Survey, 85% of directors plan to maintain (51%) or increase (34%) their investment in M&A based on current economic conditions. Similarly, 78% of middle-market finance leaders plan to maintain or increase their M&A investment according to BDO’s 2023 CFO Outlook Survey.
For organizations considering mergers or acquisitions in 2023 — during proxy season and beyond — success will depend on the board’s close oversight of management’s strategy for everything from transaction financing and valuation to post-integration optimization and stakeholder engagement.
BDO’s 2023 Shareholder Meeting Agenda explores areas where shareholders will look to the board for clarity in a year of evolving risks, challenges and opportunities. When it comes to M&A, boards should focus on several core functions: supporting due diligence efforts, managing communication with shareholders and regulators and mitigating integration risks.
What ‘Succession’ Gets Right (and Wrong) About Business Continuity Planning [Spoilers]
It’s in the very title of the show, so it should come as no surprise that HBO’s hit series “Succession” is about, well, a succession. Like other pop-culture depictions of transfers of power, the show is imminently watchable, but does it stand up to real corporate scrutiny?
Read moreSupporting due diligence
Thorough due diligence before and during the deal process has a significant impact on that deal’s ultimate success or failure. The board’s insight into the involved parties’ financial health, processes and controls — as well as its regular communication with management — provides a unique perspective on the near- and long-term value of a proposed transaction. The board should ask management pointed questions about the link to the company’s growth strategy, as well as financing and favorability of current deal terms, expected synergies, the execution plan and more.
The board’s composition — specifically the adequacy of directors’ skills and experience — can play a major role in how effectively boards evaluate due diligence findings. The board should also assess the management team’s experience level to identify potential challenges in executing the deal and realizing expected value.
Managing communication with shareholders and regulators
In line with demonstrating transparency in shareholder communications, companies considering a transaction should clearly describe the board’s role in the process — for the benefit of shareholders and regulators alike.
Shareholders should clearly understand the board’s oversight of due diligence, deal processes, post-merger integration and controls. The board is ultimately responsible for approving an M&A transaction based on the assessed value of the transaction and understanding of how it supports the strategic direction of the organization, as well as ensuring the deal terms are in best interest of the company and its shareholders.
Boards also oversee how transparently management describes the potential risk and rewards of transactions and impact on the company’s valuation, financing and liquidity. This is especially important considering rising interest rates, solvency of lenders, cultural, supply chain and other operational implications that can significantly impact the transaction outcome.
From a broader compliance standpoint, Regulation S-K Item 407(h) requires disclosure of the board’s leadership structure, its role in risk oversight and how it administers that function. The SEC has recently made this a focus area for greater scrutiny. In the fall of 2022, the SEC’s Division of Corporation Finance sent comment letters asking registrants to expand proxy disclosures regarding the appropriateness of board leadership structure, the role of lead independent directors and specific details about how the board administers risk oversight.
Given the complexity and inherent risk associated with M&A transactions and the economic uncertainty within the current markets, regulators’ focus on compelling boards to provide investors with more useful risk oversight governance information may be particularly justified.
Mitigating integration risks
For post-merger integration planning and execution, boards have an especially important role in overseeing operational decisions to ensure management plans minimize inefficiencies and optimize synergies. Establishing accountability and fit-for-purpose governance structures is a critical first step to mitigate integration risks. The board’s oversight role extends to multiple areas related to integration, including:
- Ensuring there is a comprehensive integration plan in place well before integration activities commence.
- Helping define a target operating model for the combined organization.
- Closely monitoring key integration risks, such as culture issues between the companies, and determining whether the existing management team has the skills and experience to execute the deal strategy.
- Assessing management’s preparedness for a seamless Day One transition to minimize organizational disruption.
- Overseeing management’s achievement of synergies, cost savings and other expectations relative to the deal thesis.
- Ensuring that all post-integration activities align with the company’s long-term growth strategy.
- Transparently communicating with shareholders and stakeholders about any changes to the integration plan.
Integration planning and execution is often complex, and they can drain internal resources and detract from employee engagement. Thorough post-merger integration planning can help companies mitigate against those challenges by starting the planning process soon after completing due diligence and streamlining operations for Day One.
The road ahead
Despite the lull in deal activity across the past few quarters, boards and C-suites appear to remain optimistic about the dealmaking outlook in the latter half of 2023 and beyond. M&A can be a powerful driver of value creation for an organization, but — as with any strategy that offers a high potential for growth — there can be significant downside risks. Inaccurate valuations, inexperienced with evolving deal terms, insufficient due diligence, ineffective integration planning and compliance missteps can threaten deal success at any stage.
From the letter of intent to integration planning to post-close execution, boards need to exercise diligent oversight and strong governance. Any stumbles can delay synergy capture. Proper execution puts a company on a strong competitive footing and can set them up for subsequent deal success.
Amy Rojik is a Boston-based National Managing Partner of Governance, Emerging Issues and External Communications for BDO. Amy has more than 25 years of experience in the auditing profession, engaging with financial reporting executives, audit committees and board members. Her accreditations include the American Institute of Certified Public Accountants and the Massachusetts Society of Certified Public Accountants. She is also a Governance Fellow with the National Association of Corporate Directors.
