Corporate governance issues can have a significant influence on cross-border mergers, according to a report issued in July by The Conference Board. The report, Corporate Governance and Cross-Border Mergers, examines such issues in the face of the rise in mergers and acquisitions.
Since the beginning of last year, Europe alone has been the scene of more than $40obn worth of hostile deals. The introduction of the euro can take much of the credit for this. By creating a single, liquid capital market similar to the US, companies have increasingly come under pressure to expand across the continent to find cost advantages.
Exploring the impact of corporate governance on new mergers, the report examines such questions as who will be the CEO and/or Chairman, who will sit on the board, and what the balance of power will be between the directors and the CEO. The CEOs and boards of directors of the merging companies are recommended to lay out board functions clearly, before sitting down to negotiate. The desired composition, size, and structure of the new board, and top executive compensation issues should also be examined pre-merger.
"Key corporate governance decisions in mergers and acquisitions (M&A) transactions are not necessarily directly
about corporate governance," says Lucy Alexander, a research associate at The Conference Board's corporate governance research centre and author of the report.
"They are consequences of other decisions, such as where the company will be headquartered, and are influenced by other issues such as tax, politics, and the relative strength of organisations. However, corporate governance issues may have an impact on whether deals happen or not and certainly on the price at which they occur."
The economics of an M&A deal is the key factor in shareholders' determining whether or not to lend their support. Many institutional investors are predis-
posed to support existing management in hostile bids, but their support is conditional. It does not apply where investor confidence in management has been lost or where synergistic or strategic benefits clearly justify a bid premium. Unreasonable or unjustifiably expensive defence tactics will not be supported.
The situation becomes more complicated where institutional investors have holdings in both sides of a hostile bid. M&A transactions need to be structured to be credible, value enhancing, with assured protection of minority shareholder rights and with no hint of self-dealing on the part of directors or management, says the report.