Eyes on the Road: Dos and Don’ts for a Successful M&A Strategy
Bill Wilhelm and Rick Childs - Partners, Crowe Chizek & Co.

While all public companies and many others are focusing on compliance with the increased governance requirements of the Sarbanes-Oxley Act, the SEC, or one of the stock exchanges, the trend toward intensified oversight should also extend to your institution’s merger and acquisition policies.

When a board reflects on the high-risk nature of growth by acquisition, the compressed time frame for deal decision making, and the magnitude of corporate resources involved, it quickly concludes that the scope and rigor of management’s acquisition process and the skill sets of the entire M&A team are key to a successful deal.

Make no mistake: In the final analysis, the merger or acquisition decision is one the board must make, and your attorneys will no doubt help your board comply with the legal standards embodied by the business judgment rule in its boardroom deliberations. However, if you have ever nervously sat through an enthusiastic, eleventh-hour deal presentation by management pondering whether the acquisition is right for your institution, you realize the importance of management’s skill and thoroughness with regard to M&A. In reality, as some deals have a way of taking on a life of their own, it can be very difficult for a board to stop the proverbial runaway train.

While most directors will never experience the high drama of deals like the recent Hewlett-Packard merger with Compaq Computer, they nonetheless will participate frequently in the analysis and evaluation of acquisition opportunities. By insisting on the establishment of a rigorous management process that encompasses planning, evaluation, execution, implementation, monitoring, and appropriate board involvement, directors will increase their institution’s chances of successfully navigating the risky waters of mergers and acquisitions.

This article presents some dos and don’ts to consider as you evaluate your merger and acquisition strategy.

The Dos Make sure your policies link the acquisition or merger opportunity to your strategic plan. Rigorous planning should require your institution to answer the why, what, when, and where questions before it answers the who and how questions as they pertain to growth through acquisition. Thoughtfully orchestrated market research performed and evaluated in the planning phase is generally more reliable than hurried data gathering and analysis completed during the deal evaluation phase.

Require management to have a shopping list of acquisition targets and communicate your institution’s interest to them. The better management and the board know your potential partners, the better your chances of avoiding surprises and mistakes in the evaluation, execution, and implementation phases.

Require a thorough analysis of a target’s standalone and synergistic value using a discounted cash flow (DCF) valuation technique and other appropriate valuation methods. Price multiples only tell you what the other guys have done, cash is what pays off your institution’s acquisition debt or ultimately flows to your shareholders.

Make sure your process requires integration and implementation planning from the earliest possible point in time. The value flow in most transactions results from successful implementation. Thus it is crucial that the managers responsible for implementation are involved in all phases of the process and are accountable for the results.

Make it your institution’s policy to allow your deal team ample time to evaluate target opportunities. Don’t let the urgency of the target’s timetable take your team out of its game plan. If your team has not had to evaluate opportunities recently, it may be a bit rusty and require extra time to perform its tasks. Make sure it takes the time to review every acquisition opportunity.

Make it your institution’s policy to monitor the results of past acquisitions so that it can learn from them. In many transactions, significant synergies are essential to realizing the anticipated deal value. Make sure your institution measures the actual versus planned synergies, as well as other aspects of an acquired entity.

Involve the board as early as possible. Often the broad business perspective that the board brings to the table can have a positive impact on the acquisition process. By involving the board early, any issues that board members have can be identified and addressed.

The Dont's Don’t let your management team wait for the phone to ring. If management’s first contact with a potential acquisition target is when the investment banker calls, it is at a disadvantage from a number of vantage points. Management will generally have limited time to evaluate the opportunity. It may rationalize a linkage to your institution’s strategic plan and fall in love with the deal, compromising its objectivity.

Don’t leave too much of the evaluation and execution to your lawyers, accountants, and investment bankers. Your advisers are a critical component of your acquisition team, but management and the board are in the deal for the long haul. Make sure your management team is actively involved in all phases of planning, evaluation and due diligence, execution, and implementation.

Don’t let auction bidding take deal synergy realization to a high-risk level without appropriate warning sirens. In a highly contested bidding process, the likelihood of capturing most of the deal synergies in the deal pricing is increased. When this happens, the winning bidder has little margin for error in the implementation phase of the transaction. Make sure your institution’s valuation process recognizes when this happens and sends out the appropriate alarms.

Don’t allow your management team to develop its processes and procedures on the fly. If your strategic plan provides for growth through acquisition, the strategy is fraught with too much risk to wait until an opportunity surfaces before developing the necessary guidelines.

Don’t assume that once your acquisition plan is in place, you won’t hear from your management team until it’s time to decide on a deal. By regularly evaluating your institution’s strategic plan, keeping an up-to-date list of targets, and periodically refining the acquisition process, the board and management should be engaging in frequent communication on the topic of M&A. As a result, the board’s comfort level with the process should increase.

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