Despite the impact of the global pandemic, there has been no shortage of merger and acquisition (M&A) and divestiture activity. More than 28,000 transactions were completed globally in 2020. We have seen a number of sizable deals, including Morgan Stanley/E-Trade, LVMH/Tiffany, Salesforce/Slack, Intuit/Credit Karma, Grubhub/Just Eat Takeaway, and Liberty Global/Telefonica. Respondents in a global survey by Bain & Company expected M&A to contribute to 45% of their growth in the future compared with about 30% over the past three years.
Finance has always been an integral part of the M&A process. However, until relatively recently, that role has been mostly focused on performing financial due diligence, integrating financial systems, and tracking synergy savings realisation. In the current environment, we are seeing the role of finance expand from purely an accounting lens to a more strategic role in M&A.
Two factors are driving an expanded role for the CFO and finance in M&A activity. First is the more strategic role CFOs play in the enterprise as a whole. In recent years, CFOs have become much more forward-looking and growth-oriented. Evaluating portfolio value and studying acquisition and divestiture opportunities are at the heart of the CFO's role in supporting an enterprise's growth strategy, of which M&A is an integral part. After the fiduciary role, this is finance's most important job.
The second driving force is the proliferation of data and analytics across the enterprise, which has created new opportunities to take a fact-based, data-driven, and analytic approach to all stages of the M&A process, from identification of potential acquisition targets to long-term strategic value creation.
Looking at the five main stages in the M&A process (see the diagram, "M&A's 5 Stages"), we can identify the critical roles that finance increasingly plays throughout.
M&A's 5 stages
The rapid expansion in publicly available data has allowed investors and acquirers to garner significant intelligence about acquisition targets. At one large US financial institution, the finance team has been maintaining target company data books that have been updated every quarter for more than 20 years. The data books track the financial performance and gather market intelligence of potential acquisition targets for each of the institution's major divisions. In recent years, manual data collection processes have been replaced by artificial intelligence and data-mining tools that feed advanced analytic models to update valuations and possible bid scenarios.
Equally important, but often neglected, is that divesting assets can be as strategically important as acquiring new ones. In fact, 78% of companies surveyed by EY in 2020 expected to initiate divestment activity in the next two years. CFOs have a key role to play in measuring portfolio value and isolating opportunities to realise value through asset divestment. They can also expedite the process by identifying potential buyers, easing the due diligence process, and preparing assets for a seamless decoupling.
Due diligence has long been foundational to structuring M&A transactions. Historically, this was largely confined to financial data; however, in recent years the scope has expanded significantly. Due diligence now analyses data on a broad range of topics, including potential litigation risks; employee demographics including diversity; sustainability strategies; enterprise data quality; system complexity; and the relative strength of customer, supplier, regulator, and investor relationships. Ultimately, all of these datapoints feed into a financial model that develops valuations, establishes potential acquisition prices, and forecasts future financial returns. Finance owns these processes and is being asked to expand capabilities to handle not only financial data but also operational and market data, structured and unstructured.
Day one operation
Planning for a successful start following the completion of an M&A transaction is crucial for deal success and sets the foundation for both near-term synergy realisation and strategic value creation. The key parts of this planning include ensuring that the essential data required to run the combined business is available, accurate, and harmonised, and that the systems are capable of effectively operating and accounting for the merged or divested entities. Companies with well-defined M&A playbooks can mobilise multidisciplinary teams with embedded finance skills around key data and system elements that combine business, functional, and technical expertise.
Today, these teams are using sophisticated data sourcing, cleansing, migration, and harmonisation tools to rapidly assimilate and merge data across all parties to a transaction. As companies increasingly digitise core operating processes and migrate systems and data to the cloud, many historic integration challenges of incompatible systems and poorly governed data are becoming less common. This accelerates integration and reduces the risks of data- and system-driven integration challenges. However, CFOs need to ensure that the underlying data and system architectures can rapidly handle integration and divestiture challenges. All too often, selling entities remain saddled with long-term support agreements for businesses they no longer own, which can reduce the strategic value of acquisitions and divestitures.
Almost all M&A deals are founded upon some strategic logic for combining two or more entities. However, that is rarely enough to convince investors and lenders to back a deal. They are not prepared to wait for the benefits to accrue; they want a payback in the short term through the realisation of synergy savings. Again, finance is central to the value proposition. Estimating savings from organisational streamlining, contract renegotiation, overhead cost reduction, elimination of duplicate activities, and scale economies is founded upon the quality of the data used to make estimates and, more importantly, tracking and reporting savings as they are realised. The longer it takes a merged organisation to truly harmonise data, the longer synergy savings take to be realised and the greater the risk of a deal's economics not meeting expectations. A 2018 McKinsey study reported that synergy savings targets were almost twice as likely to be met or exceeded when CFOs played an integral part in the synergy management process.
Value creation (and risk mitigation)
Today, more and more M&A deals are predicated on strategic logic that is underpinned by the value of combining data, products, relationships, and/or markets to create value. Combining product sets, customer bases, market access, sourcing, administration, and innovation all require a robust, scalable, and adaptive financial planning and management architecture. All too often organisations lose focus on the strategic rationale for a deal after the high hurdles of deal closure and synergy realisation have been cleared.
The deals that pay off handsomely are those where finance keeps the leadership team honest and tied to the strategic rationale of the deal. In the worst case, that may mean that finance has to confront and communicate the uncomfortable reality that a deal has failed and that it is better to cut losses and move on. Discipline and focus while avoiding emotional bias are central to enabling the realisation of the original value proposition and uncovering new sources of value over time.
The CFO and finance team are not just partners to the C-suite, but also leaders in ensuring discipline, focus, and analytical rigour in M&A. The ability to manage M&A sustainably across an enterprise as the business portfolio changes is a core competency that underpins strategic and operational success. Investors, regulators, and board members are becoming increasingly conscious of the value (and risks) associated with M&A. Emerging technologies are shortening cycle times, reducing risk, and delivering more predictable outcomes; however, management needs to commit to managing M&A with the same care and discipline that it commits to other elements of the enterprise. One final note of caution, however. Recent research has identified that one of the biggest reasons for a failed M&A is not directly financial or operational in nature. Strategic logic and a compelling business case are all for nought if organisational and cultural alignment and integration are not successful. Finance has a role to play here as well.
The metrics that are used to measure performance, aligning financial policies and controls, merging organisations and job descriptions, and creating a unified financial calendar, can all have an impact on culture. Being sensitive to the harmonisation of policies and practices, such as travel and entertainment, spending approval levels, and, in today's post-pandemic world, remote working practices, can smooth the integration process. Finance is instrumental not just in making sure the numbers add up but also in ensuring M&A transactions deliver lasting value.
David A. J. Axson is a consultant and author and a retired partner from Accenture, a co-founder of The Hackett Group, and former head of corporate planning at Bank of America. To comment on this article or to suggest an idea for another article, contact Neil Amato, an FM magazine senior editor, at Neil.Amato@aicpa-cima.com.