Poll of Directors Reveals M&A Challenges as COVID-19 Persists

During this time of global health crisis, disruption, and uncertainty, 86.1 percent of directors say that the COVID-19 pandemic has affected their ability to pursue, finance, and close merger and acquisition (M&A) deals, according to the 2020 NACD/Deloitte M&A Poll, conducted for a second year to explore trends in the board’s role in the M&A process.

This year’s results include feedback from 178 directors who responded to an NACD email request between August 5 and 25, 2020 seeking their participation. While the survey results reveal the effects of COVID-19 on M&A activity, they also provide insight into the most important related risks for directors and the areas in which boards may have to evolve to offer adequate oversight of the M&A process.

The Pandemic Alters M&A Closings

With a majority of respondents saying that COVID-19 has affected their ability to pursue, finance, and close M&A deals, more than one-fifth (20.8%) of poll takers say it has “significantly” affected their ability to close deals. Amid this difficult M&A climate, 67.2 percent of respondents agree that there is now a greater role and opportunity for nonexecutive board members to lend their previous experience to management during M&A discussions.

Fortunately, most boards appear to have the experience necessary to provide such guidance to their C-suites, as the vast majority of respondents (96.4%) say that their boards already have one or more directors with some background in M&A.

Nevertheless, in these trying times, some boards are seeking reinforcements. More than a quarter of respondents (26.1%) indicate that their boards have considered bringing on new members with specific expertise in M&A.

Boards already play a critical role in the M&A process, overseeing the various risks associated with any deal. Of the key risks related to M&A transactions that board members concern themselves with, respondents deem valuation (e.g., the risk of overpaying) and value realization (e.g., synergy execution) the most important.

Other notable key risks include hidden liabilities and those associated with change management and culture. More than one-third (32.1%) of respondents indicate that their boards will have to evolve how they provide oversight to address the major risks inherent in the M&A process, including in the three areas below.

Nonfinancial Metrics Lacking

The aim of any merger or acquisition is to achieve sustainable growth. While it is essential to monitor important financial metrics (for example, metrics associated with financial statements prepared using generally accepted accounting principles), such metrics may not provide a complete picture of a merger or acquisition deal. Key nonfinancial metrics related to culture, community support, brand health and reputation, and sustainability may add to the picture and have even gained in importance during the pandemic. The COVID-19 outbreak has cast a spotlight on the efforts organizations have made, or the lack thereof, to be better corporate citizens.

In addition, a focus on sustainability is increasingly associated with resiliency to new and atypical risks, such as climate change. Only 31.8 percent of respondents, however, indicate that nonexecutive directors receive information on the merging or acquired companies’ progress against nonfinancial benchmarks through the close of a deal.

According to NACD’s “Strengthening Oversight of M&A” installment in its Director Essentials series, a relevant question boards may wish to ask is, “What metrics will the board use to measure the transaction’s overall success?”

Integration Strategy Needs Oversight

This year, a larger proportion of respondents indicate that their boards will hold management accountable for integration strategy (93 percent this year, compared to 84 percent last year). So close to the finish line, it is at the integration stage that many organizations notoriously trip up and the prospective benefits of a deal are lost. As organizations endeavor to realize the prospective value of a given merger or acquisition for stakeholders, it behooves boards to remain vigilant and monitor management, even after requisite signatures are affixed to the dotted line.

Questions for the board to ask include: do we have the right mix of leaders from both companies to lead the post-integration effort?

Pre-close Process Commands Board Attention

Finally, the majority (58.7%) of director respondents believe that it is likely that the acquisition pre-close process will be subjected to increased levels of scrutiny by shareholders and regulators in the coming months. It is thus critical that boards ask the right questions at this stage, such as the following:

• Under state law or our bylaws, do shareholders need to approve this sale?

• What authorities need to be notified of this transaction and when?

• Does the transaction require regulatory approval, and what are the arguments for and against it? How strong is our position?

Even before the outbreak of COVID-19, many companies were struggling to adapt to trends such as exponential technological change and the reinvention of industry and business models. One efficient way for companies to adapt is to acquire new capabilities via M&A transactions. As such, executive teams will continue to rely on their boards’ guidance throughout the deal process both today amid the pandemic and beyond into whatever new normal the future holds.