Finance's Expanded Merger and Acquisition Role
Despite the global pandemic's impact, merger and acquisition (M&A) and divestment activity has remained plentiful. In the year 2020, more than 28,000 deals were completed around the world. Morgan Stanley/E-Trade, LVMH/Tiffany, Salesforce/Slack, Intuit/Credit Karma, Grubhub/Just Eat Takeaway, and Liberty Global/Telefonica are just a few of the large deals we've witnessed. In a global poll conducted by Bain & Company, respondents predicted that mergers and acquisitions will account for 45 percent of their future growth, up from around 30 percent in the previous three years.
Finance has always played an important role in mergers and acquisitions. However, until recently, that function was primarily focused on financial due diligence, financial system integration, and tracking synergy savings realization. Finance's involvement in M&A is expanding from merely an accounting lens to a more strategic function in the current environment.
Two factors are driving an enhanced role for the CFO and finance in M&A activity. The first is the higher strategic role that CFOs play in the overall business. CFOs have grown considerably more forward-thinking and growth-oriented in recent years. The CFO's involvement in supporting an enterprise's growth plan, which entails M&A, includes evaluating portfolio value and investigating acquisition and divestment prospects. This is finance's most significant job after the fiduciary responsibility.
The proliferation of data and analytics across the company is the second driving force, which has created new opportunities to apply a fact-based, data-driven, and analytic approach to all stages of the M&A process, from identifying possible acquisition targets to creating long-term strategic value.
Looking at the five main stages of the M&A process (see diagram), we can see the crucial roles that finance is progressively playing throughout.
Investors and acquirers have gained tremendous insight into deals acquisition targets thanks to the rapid development of publicly available data. For more than 20 years, the finance division at one large US financial institution has kept target company data books that are updated quarterly. The data books track financial performance and gather market research on potential acquisition targets for each of the institution's main divisions. Artificial intelligence and data-mining techniques have supplanted human data collection processes in recent years, feeding advanced analytic models to update valuations and probable bid scenarios.
Equally crucial, but frequently overlooked, is the fact that selling assets can be just as strategic as buying new ones. In fact, according to EY's 2020 poll, 78 percent of companies anticipate beginning divestment activity in the next two years. CFOs play a critical role in determining portfolio value and identifying opportunities for value realization through an asset sale. They can help speed things up by discovering possible purchasers, facilitating due diligence, and preparing assets for a smooth decoupling.
Due diligence has traditionally been an important part of arranging M&A deals. Previously, the scope of this was mostly limited to financial data; but, in recent years, the reach has substantially grown. Due diligence now examines data on a wide range of topics, including the relative strength of customer, supplier, regulator, and investor relationships, as well as potential litigation risks, employee demographics, including diversity, sustainability strategies, enterprise data quality, system complexity, and enterprise data quality. All of these data points eventually flow into a financial model that calculates valuations, determines prospective purchase prices, and projects future financial returns. Finance is in charge of these processes, and it has been required to expand its ability to manage both structured and unstructured financial, operational, and market data.
After the Deal
Planning for a successful start after an M&A deal is critical for deal success, as it sets the tone for both near-term synergy realization and long-term strategic value development. Ensure that the essential data required to run the combined organization is available, accurate, and harmonized and that the systems are capable of properly operating and accounting for the merged or divested entities are key components of this strategy. Companies with well-defined M&A playbooks can mobilize multidisciplinary teams with embedded financial capabilities around key data and system components that combine business, functional, and technical expertise.
Today, these teams use sophisticated data sourcing, cleansing, migration, and harmonization tools to efficiently assimilate and merge data from all parties to a transaction. Many past integration challenges of incompatible systems and poorly governed data are becoming less common as businesses progressively digitize core operating operations and shift systems and data to the cloud. This speeds up integration while lowering the likelihood of data and system-driven integration issues. CFOs must verify, however, that the underlying data and system infrastructures can manage integration and divestment challenges quickly. All too frequently, selling entities are sometimes burdened with long-term support agreements for firms they no longer own, lowering the strategic value of acquisitions and divestitures.
Almost all M&A deals are based on a strategic logic for integrating two or more entities. However, that rarely suffices to persuade investors and lenders to support a deal. They are not prepared to wait for the benefits to accumulate; they want a quick return on their investment through synergy savings. Finance is, once again, at the center of the value proposition. The accuracy of the data used to produce estimates, as well as tracking and reporting savings as they are realized, are critical to estimating savings through organizational streamlining, contract renegotiation, overhead cost reduction, removal of redundant operations, and scale economies. The longer it takes for a merged company to completely harmonize data, the longer it will take to realize synergy savings, and the higher the risk of a deal's economics failing to match expectations.
According to a 2018 McKinsey study, when CFOs were included in the synergy management process, synergy savings targets were nearly twice as likely to be met or surpassed.
Value Creation & Risk Mitigation
Today, more and more M&A deals are based on strategic logic that is reinforced by the value of merging data, products, relationships, and/or markets to generate value. A comprehensive, scalable, and adaptive financial planning and management architecture is required to integrate product sets, customer bases, market access, sourcing, administration, and innovation. After the high obstacles of deal close and synergy, the realization has been crossed, all too frequently companies lose sight of the strategic purpose for a deal.
Deals that pay off handsomely are those in which finance keeps the leadership team honest and related to the deal's strategic purpose. In the worst-case scenario, finance may be forced to face and express the unpleasant fact that a deal has failed and it is preferable to cut losses and move on. Discipline and attention are essential for realizing the initial value proposition and identifying additional sources of value over time while avoiding emotional bias.
The CFO and finance team are not just advisors to the CEO, but also leaders in assuring M&A discipline, focus, and analytical rigor. A basic competency that underpins strategic and operational success is the capacity to manage M&A sustainably across an organization as the business portfolio changes. M&A's value (and risks) are becoming increasingly apparent to investors, regulators, and board members. Emerging technologies are reducing cycle times, lowering risk, and delivering more predictable outcomes; but, management must commit to managing M&A with the same attention and discipline as it does other aspects of the business.
However, there is one final word of warning. According to a new study, one of the most common reasons for failed mergers and acquisitions is not financial or operational. If organizational and cultural alignment and integration are not successful, strategic reasoning and a compelling business case will be for naught. Finance also has a role to play in this.
Metrics used to measure performance, integrating financial policies and controls, merging organizations and job descriptions, and developing a uniform financial calendar can all have an impact on culture. The integration process can be sped up by paying attention to the harmonization of policies and practices, such as travel and entertainment, expenditure approval levels, and, in today's post-pandemic era, remote working habits. Finance is critical not only for ensuring that the numbers add up but also for ensuring that M&A transactions deliver long-term value.