The Governance Challenges of M&A in a Changing Market

The mergers and acquisitions (M&A) environment continues to evolve, with elements such as private equity influence, global uncertainty, and cultural integration adding layers of complexity to any transaction. For boards and directors, the stakes for M&A are high. Although there are opportunities for value creation, corporate growth, and transformation, there are also considerable risks. Therefore, governance structures must adapt accordingly during transactions, requiring boards to show their flexibility and resilience by balancing strategic ambition with risk oversight.

Following multiple years of generally sluggish M&A conditions, deal activity is ramping up, headlined by a steady flow of megadeals. Several factors are driving these deals, including technological innovations such as artificial intelligence (AI), shifting regulations, falling interest rates, and global competition. AI in particular is emerging as both a driver and an enabler of deals, fueling acquisitions for capability and potentially improving the speed and quality of execution.

In addition, M&A activity is experiencing a sustained resurgence driven by stabilizing interest rates, improved market confidence, and the significant amount of undeployed private equity capital waiting to be invested. Strategic buyers are again prioritizing growth, technology, and scale over short-term caution.

Without recent exercise, M&A muscles may have suffered some atrophy within many boards, making now a critical time to evaluate processes and ensure that best practices are in place ahead of the anticipated uptick.

In addition to a lack of activity, the overall deal environment is very different than it was just a few years ago. The global political landscape has created new obstacles for some cross-border transactions, while new opportunities have emerged in other areas. Boards must consider that past performance may not be a reliable predictor for the future. What once enabled a deal to be successful and facilitated movement may have changed, requiring considerations to be realigned for effective oversight.

The Importance of Effective Governance in M&A Transactions

The board’s role in M&A extends far beyond simply approving transactions. It must establish clear oversight processes, manage potential conflicts of interest, and, perhaps most importantly, establish board independence.

Board independence is crucial to creating an environment that drives clarity and an open-minded approach that can help anticipate challenges and potential opportunities in the deal process. Independence can help boards challenge management’s assumptions on M&A strategy and deal terms, establishing clear, consistent parameters for a successful deal that is in the best interests of the company.

The board must also consider how a potential deal could affect its governance structure moving forward. Depending on the size and scope of the transaction, the board may acquire new skills, committees, or directors or potentially even stand up a new board.

Board Oversight of Leadership

M&A transactions are inherently complex, with many factors that company leadership must manage to create a successful deal. With the potential ramifications a deal’s success or failure could have on the entire company, the board must maintain effective oversight of several variables within an M&A transaction and provide insight and guidance when necessary.

For example, boards must keep an eye on how leadership is taking the political landscape into consideration for potential regulatory risks or international issues that may complicate cross-border transactions. In addition, economic volatility may alter the potential value and timing of a deal, and emerging technology can provide deeper insight into potential risks and success. What follows are some additional questions that can guide board oversight of leadership.

What Are the Deal Parameters?

Boards must ensure that leadership considers the impact that a deal will have on the financial condition, both if a deal is successful and if it fails. As with any deal, timing is critical—especially in a dynamic financial environment. If leadership has based a potential transaction’s success on certain factors, such as current interest rates or current regulatory standards, the board may want to explore and potentially challenge those assumptions.

In addition, the type of deal can have a significant effect on its risk profile, whether it is a merger, integration, or carve out.

What Is the Reasoning Behind the Deal?

A successful deal can accomplish several critical goals for an organization. For example, a transaction can help a company solve a specific problem, expand into a new sector or region, or prevent a competitor from expanding. Is this an offensive move or defensive? Is it taking advantage of an opportunity, or is it based on fear or uncertainty? The board can help management understand whether it can achieve the proposed goals and whether the risk is worth the potential reward.

What Regulatory Challenges Does a Deal Bring Up?

Depending on a company’s size and industry, an M&A transaction could create a complex web of new regulatory requirements and challenges, such as those related to data privacy, antitrust issues, and environmental, social, and governance guidelines. Any issues are often amplified when a potential deal crosses international borders. The board should oversee management’s analysis of regulatory requirements and related risks, providing feedback and dictating further reviews if necessary.

What Does Success Look Like?

Of course, any proposed M&A transaction should have a measurable benefit to the organization. Company leadership must define success in a deal as well as the time to value. In addition, leadership should detail what repercussions might occur if a deal does not take place and if any reasonable alternatives exist. With its fiduciary responsibility to stakeholders, the board should work with management to inject choice and options into the decision-making process to create alternatives, drive clarity, and ensure the best choice is made to increase or protect value.

Elevating Strategic Decision-Making in a Transaction

With the board’s diverse background and perspectives, it has an opportunity to provide a unique point of view on how M&A transactions can influence the company’s competitive positioning, future prospects, and long-term strategy, delivering significant value beyond leadership oversight. The ultimate goal for the board is to strengthen decision-making during a transaction and provide a crucial additive element to leadership activities during the deal process.

For example, management and strategic advisors are typically responsible for negotiations, but major transactions should require board approval. The board can approve, deny, or require adjustments to any deal terms, as well as form committees or bring in independent third parties to evaluate the transaction details. Providing this level of oversight and governance increases transparency and confirms objective decision-making during the deal process.

In addition, the board can draw from past experiences to play a pivotal role in due diligence prior to any transaction. While management is responsible for conducting due diligence, the board should be involved to ensure all key factors—operational, legal, regulatory, financial, cultural—are properly evaluated, providing input on potential deal breakers, risks, and material concerns.

If board members see any potential red flags during due diligence or potential obstacles that could challenge the deal, the board could require additional third-party analysis or stress testing of management’s forecasts to further protect the company.

Ongoing, focused communication is an important and often overlooked aspect of a successful deal. Especially in a rapidly evolving deal environment, the board should oversee management’s engagement strategies for several key groups, including shareholders, employees, regulatory bodies, customers, and any other stakeholders.

Effective communication is essential throughout the process, and transparency can help manage expectations, address rumors, and create ongoing support for the transaction. Boards should be actively involved in overseeing communication plans for relevant internal and external parties with messaging that is timely, consistent, and aligned with company values.

Following up on the cultural aspect of a potential transaction, the board’s insights are typically an important element of successful integration planning and execution. With so much value tied to effective integration, the board should evaluate management’s integration benchmarks and timelines that encompass organizational structure, systems, process, and culture. The board should monitor progress, establish clear expectations, and establish accountability for management to meet goals.

For successful transactions, effective integration continues well beyond the close of a deal. Therefore, the board must stay engaged in post-merger integration processes, monitoring progress, outlining priorities, and holding management accountable for delivering on agreed-upon objectives and strategic alignment. The ongoing oversight from the board optimizes the value of the transaction and positions the company for long-term success.

Conclusion

M&A transactions often represent significant opportunities and risks for companies, especially now as activity is poised to increase and the economic, geopolitical, and technological environments create some uncertainty. These conditions emphasize the importance of board oversight and involvement throughout the deal process, from consideration to integration and beyond.

The board plays an integral role in positioning the company for beneficial M&A transactions and enabling it to be resilient enough to survive potential failure. By establishing effective governance, asking the right questions when providing board oversight, and delivering diverse perspectives in critical areas, including due diligence and integration, the board can set the tone for M&A transactions that mitigate risks, secure operations, deliver on anticipated value, and ultimately position the company for future success.

Jerry Martin is a member of the Board of Directors and International Tax Practice Leader at RSM US LLP.

Vikas Sekhri is the Chair of the Governance Committee of the Board of Directors and National Leader of M&A Tax Services at RSM US LLP.

RSM US LLP empowers middle market companies worldwide to take charge of change. The clients we serve are the engine of global commerce and economic growth. Our unique middle market perspective makes RSM the natural choice for growth-oriented, internationally active organizations seeking relevant insights and tailored, innovative solutions for a complex and changing world. With a global reach spanning more than 120 countries, we instill confidence in a world of change by bringing the full power of RSM to make a lasting impact on our clients, colleagues and communities. For more information, visit rsmus.com, like us on Facebook, and/or connect with us on LinkedIn.