Boards should watch out for takeovers as risk returns

The recent stock market rally in the US may have many boards of directors optimistic that when 2012 is over, they will be able to say they did the most they could to build shareholder value for their investors – and it worked. The Dow Jones Industrial Average is up more than 5 percent since the start of the year, but small-cap stocks have done twice as well, up about 11 percent.
 
The New York Times recently reported that the 11.3 percent rise in the Russell 2000 Index, which tracks small-cap stocks, was due in part to investors being more willing to take risks now that unemployment seems to be headed lower and many growth indicators are inching higher.

Corporate boards can take some of the credit for the growth in smaller and larger companies, but that growth may be accompanied by another problem: becoming a takeover target.
 
The markets’ willingness to take more risk likely extends to activist investors, private equity firms and larger companies. They all may begin to take more risk as well, making well-run smaller companies with clean balance sheets very attractive.
 
Last September, the Federal Reserve reported that non-financial companies held more than $2 trillion in cash on their balance sheets and, with the economy looking better, many companies will start seeking ways to put that money to work. That means corporate boards of smaller companies should begin planning for a scenario where they are approached for a merger or become an acquisition target.
 
Sometimes these matters can be overlooked at smaller companies. Be sure that doesn’t happen this year. Considering the possibility of a takeover will at least give the board some control in the process. If there is a list of possible suitors the board would be in favor of, identify the terms and conditions the board thinks would be in the best interest of the company. There may also be a list of preferred strategic partners it would make sense to merge with so both companies can grow sensibly. Sometimes a merger is in the best interests of everyone.
 
The board might also want to review what it is prepared to do to thwart a hostile takeover. A discussion about whether to use heavy-handed poison pill strategies or more subtle governance provisions, such as staggering the election of board members, can make a difference during negotiations.

Many market observers are predicting that 2012 will be a big year for M&A transactions in the US. The boards of all companies, but particularly smaller companies, should make sure they do not sell themselves short.