Maximizing Corporate Value through Mergers and Acquisitions: A Strategic Growth Guide

Chapter 9

Role of Corporate Governance in M&A

One of the real challenges in mergers and acquisitions (M&A) is doing good deals and avoiding bad ones. We have discussed how the volume of bad deals is troublingly high. Admittedly, armed with hindsight, the amount of poorly conceived M&A that turned out to be major failures is hard to explain. For major deals, that is, those that are significant in terms of asset size compared to the size of the bidder, the deals generally have the recommendation of senior management and most importantly, the CEO, and then are approved by the board of directors. Thus, for major deals, these two parties, the office of the CEO and the board, bear the responsibility for a deal's success or failure. Therefore, we will discuss the role each plays in corporate governance in general, but also specifically related to M&A.

Agency Cost Problem

Shareholders are the ultimate owners of the company. However, for large corporations, the term owner conveys a different meaning from what it does for small businesses. In a small business, the owners pick the managers, and they also may play a major role in management themselves. With large companies, however, most shareholders hold a relatively small percentage of the total shares outstanding. This is often true for large institutions and even aggressive hedge funds. For institutions, their stockholdings in a given company are one of many investments they may have. Thus, they do not have a big incentive to closely ...