What happens to a company's existing board during a merger?
Mergers are about the business of marrying two businesses. As the board of directors is at the highest level of governance, they are on the front lines of a merger. In all aspects, corporate merging is a top-down process. That’s an important factor because mergers trigger uncertainty and ambiguity throughout the organization. The uncertainties cause a drop in the trust level. It’s common for all or most board directors, managers and other employees to go into self-preservation mode.
As the top corporate leaders, board directors will be the first to experience the mental and emotional effects of a merger. Feelings of insecurity and uncertainty are natural responses to such a major event.
Regardless of whether the board directors believe they will be staying on or moving along, they play an important role during the merger. Those who will continue with the company also have an important role as the company moves into its new chapter.
Before a merger, the board’s role is a proactive one. At some point, both companies will need to collaborate on which board directors constitute the best composition of the newly joined company. The leadership skills needed for the new company may be very different than what either of the old companies needed in their previous leadership. The best approach is to view it the same as board refreshment where board directors must put their own interests aside in favor of those of the company. This means that no one is guaranteed a seat on the board. Once the merger is almost complete, the new board will need to be formed as quickly as possible.
The Board’s Role During a Merger
In addition to giving due diligence to the merger to ensure that they make the best deal, the board needs to keep the company running as usual to keep the stock prices high. This can be challenging in itself because of the uncertainty that floods through a company during a pending merger. The board is also responsible to advocate for the best outcome for the merger despite any government interventions.
Boards are especially challenged when mergers take a long time. In a fairly recent example among wireless companies, T-Mobile attempted to take over Sprint. Both companies spent seven years pursuing some form of merger. They abandoned attempts at merging in 2013 and 2017 before they finally struck a $26 billion deal in 2016. However, it wasn’t long before they hit a major snag.
The federal government expressed concerns over the balance of power and fair competition in the U.S. wireless market. The judge on the case noted that the wireless industry has already undergone a few major transformations. The first mobile phones were large, heavy and extremely expensive. As technology advanced, the prices came down, along with the size of the mobile phones, and flip phones became all the rage. The judge also noted that today’s products and technologies may very well be outdated and unmarketable in the near future. It’s looking like there will be a ruling in favor of the merger.
The Board’s Role When the Merger Is Almost Complete
The playwright John Dryden stated, “Self-defense is nature’s oldest law.” As the time for the completion of the merger draws near, boards must behave in a statesmanlike, selfless manner. This is the time for them to resign themselves to the notion that the board will indeed need to be reconfigured and that they have an equal chance of staying or going. Along these lines, resigning board directors will have to face losing their compensation.
According to research by DHR International, board directors are at risk of losing their positions more than any other employer group. With this in mind, boards should begin having discussions about what constitutes reasonable notice periods in the event that there is a sudden change of control. Boards should also be sure that board director contracts include language that includes control clauses that give existing board directors due consideration, especially in the event of a hostile takeover.
DHR International analyzed board composition before and after 50 M&A deals and found that almost half of executive directors left the company within two years after a merger. Also, within two years of a merger, two-fifths of non-executive directors had also left the company. Board-level directors are the most likely to lose their board seats after a merger and they’re much more likely to lose their positions than any other category of staff. About 43% of board directors no longer held their positions within the two years following a merger. Of those board directors, executive directors have the highest risk of losing their jobs. Around 47% of executive directors left in the same time. The percentage is slightly less for non-executive directors at 41%.
One of the final steps in a merger is for the senior management teams and the major shareholders to engage in multiple discussions about management structures and operational structures of the combined company that will result in a detailed plan. Shareholders should be in agreement before any contracts are signed. Shareholders usually get the final say on who becomes the new CEO. Depending on the structure of the combined company, there may few or no jobs lost at all.
In the case of a genuine merger, the senior roles are usually filled by individuals from both companies, but that’s not always how it works when the merger is a result of a hostile takeover. Sometimes it’s clear that one of the top candidates is the obvious candidate while another candidate may fit more naturally into another role in the C-suite.
In getting back to our example of T-Mobile and Sprint, the boards of both companies have had to navigate these waters carefully due to the long duration of the planning for the merger and all the obstacles they’ve encountered along the way. One important job that these boards and others have as they manage their companies through a merger is to anticipate and analyze changes in the market value of both companies. Shares of T-Mobile and Sprint remain strong, which is a direct reflection of their boards.
