M&A: From Disasters Come Much Better Questions


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The most important boardroom lessons tend to arise from… abject failure. Speaking of which, let’s chat about M&A.

Cite whichever study you prefer, but the data (that’s not produced by M&A investment bankers) are clear: most M&A deals are value-destructive.

From my experience, when it comes to small-cap M&A, you might wish to pick modifiers that are a touch stronger than “most” and “value destructive.”

The austere realities dictate that small-cap board members need to ask different questions – at least preliminarily – than those who oversee larger public companies when it comes to M&A.

Here’s what I’ve learned from watching lots of disasters as an institutional investor, board member, and advisor.

First time. One of the key reasons why governing small-caps can’t possibly be the same as governing mid- and large-caps is that many small-caps are operated by those who have never done the job before. Tim Cook and Mary Barra have presided over dozens of acquisitions. But Tom Cook and Marta Barra might never have acquired a company. Accordingly, great small-cap boards respectfully inquire about management’s acquisition experience (and what they learned from successes and failures).

Early and often. Small-cap companies lack the resources of larger companies. When you combine ubiquitous existential threats with a more diminutive headcount, you get management teams that are often (and understandably) behind the curve. In smaller public companies, everything happens on a compressed timeframe, and there is much less opportunity for comprehensive analysis. Consequently, great small-cap boards make it very clear with CEOs that they would like to be apprised of any potential M&A when it is still in gestation, so they have the ability to confer in the absence of management and potentially even seek out third-party expertise. When this doesn’t happen, small-cap boards get presented with an M&A deal a few days before a board meeting, and all the information to be used for the board’s “analysis” is – unsurprisingly – asymmetric (read: glowingly supportive of said transaction).

Hear directly from others. Much more than at larger companies, small-caps can be like private companies that happen to have ticker symbols. In other words, the CEOs can have outsized control – including over M&A decision-making. Now, the CEO could certainly be right that a particular acquisition is a potentially valuable deal for stakeholders. But, to confirm that it’s not just a pet project of one, make sure to bring other management before the board – without the CEO present – to offer their candid thoughts on the propriety, diligence, integration, and consideration, etc. When CEOs are uncomfortable with this, well, enough said.

Failure. Everyone knows what success looks like post-acquisition; all the buzzwords in the .ppt decks like “synergies” and “accretiveness” come true. Less often discussed during board meetings about potential acquisitions is… what failure would look like. Great small-cap boards ask management teams to benchmark worrisome performance metrics, because smaller public companies can’t afford to misallocate (their smaller amounts of) capital. Incidentally, when management has no/crummy answers about what failure might look like, you also just found out how well they understand M&A.

Cyber. Most companies that small-caps can afford to acquire don’t apply the same time and expense to cybersecurity as larger companies. Accordingly, it’s even more important for the digital “endpoints” of a potential acquiree to be scanned for malevolent code before closing any deal. Remember, the second you plug their systems into yours, you just inherited their (lack of) cyber hygiene. Be smart: the one-page IT/cyber questionnaire dutifully filled out by the M&A target in your board materials isn’t likely worth the paper it’s printed on.

This piece was adapted from a recent note I sent to my firm’s global community of 1000s of executives.  It’s free to sign up for these periodic articles and takes approximately 7 seconds here: https://adamjepstein.com/boardrooms-in-the-news/

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A globally recognized small-cap expert, Mr. Epstein has advised, governed, and invested in hundreds of small-cap companies. His capital markets and corporate governance acumen are products of a singular perspective – a former corporate attorney, operating executive, institutional investor, and, now, board advisor. As Bloomberg Businessweek commented regarding Mr. Epstein’s category-defining corporate governance book, “attention, directors of small-cap companies. Help is on the way.” 

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