M&A: A Key Cylinder in the CFO’s Growth Engine - Part II
Business leaders searching for step function growth frequently turn to mergers or acquisitions (M&A) to achieve their objectives.
According to Reuters, M&A volume globally climbed 30% in Q1 2024 and nearly 60% in the USA.* The problem is, according the to Harvard Business Review, 70-90% of acquisitions fail.**
From developing the pool of M&A targets through successfully integrating the acquired company, CFOs should have their fingerprints all over an M&A transaction.
If you are a CFO or finance leader at a high growth company learning how to search for, analyze and execute M&A opportunities is part of your job, this two part series is for you.
In Part I of, M&A: A Key Cylinder in the CFO’s Growth Engine, we covered the first six steps in the process:
- Strategic Planning and Target Identification
- Preliminary Due Diligence
- Valuation and Negotiation
- Definitive Agreement and Due Diligence
- Regulatory Approval and Antitrust Review
- Shareholder Approval.
Steps 1-6 can be exhausting but a successful acquisition will only happen if steps 7-12 are effectively managed.
In Part II we cover steps 7-12, from Closing & Funding to Continuous Improvement and Adjustments.
7. Closing and Funding:
The terms agreed to in Step 4 drive the documentation required to close the transaction. Closing complexity expands when outside funding is part of the deal, multiple locations or entities are included, international borders are crossed, the ownership structure is complicated and for various other reasons. Tailor your M&A closing team to reflect the complexity of the transaction.
An effective close requires resource planning that ensures the right talent is available to review and negotiate the documents. Well thought out Memos of Understanding or Letters of Intent are helpful in keeping a transaction on track, but deep attention to detail on the final documents is crucial for success.
At this stage the energy level of your team must be high. The first 6 steps can be intense and exhausting. One of your jobs during steps 1-6 is to make sure the team has enough gas in the tank to be effective in steps 7-12. This is when they need to put the pedal to the metal, not take their foot off the gas.
Use CFO.University’s three part CFO Success Series on Treasury to prepare for funding the merger or acquisition. Start with part I, CFO Success Series: Treasury Part 1- Capital Planning.
8. Integration Planning:
Scott Philips discusses change in his piece, When You Have to Rock the Boat: Managing Transitions. He lists 10 steps to take for effective change management. These steps will encourage and enable you to manage the transition from your transaction with more confidence.
“A smooth transition is signaled by good communication, clarity of expectations & accountability, good progress measurement, ability to adjust as needed, and a clear future is outlined” - Scott Philips
“..why does M and A fail? First , [poor] integration. These include topics like cultural mismatch or [not] bringing key leadership and key talent to one team, but this also includes lack of due diligence process where the skeletons reveal themselves after the acquisition.” - Grant Jones
9. Day One Readiness:
Day One, the day the deal closes, is a critical day to an M&A transaction. It sets the tone for all employees and other stakeholders on how business will be conducted going forward.
To help prepare for this Korn Ferry prepared a Day One checklist. It includes 3 overarching themes,
a. Create stability and direction
“Solidify leadership decisions by obtaining clarity and alignment on what great leadership looks like and make strong selection decisions with a consistent, objective, and transparent talent planning process.”
b. Move with speed
“Maximize pre-close integration planning by providing dedicated resources for an issue-free Day One.”
c. Lead the change
“Build confidence by sharing why Newco will be successful, put a “one company” culture at the heart of your integration strategy, and provide employees with answers to their “what’s in it for me?” questions.”
Here is a link to Korn Ferry’s Day One Readiness Checklist
10. Post-Merger Integration:
Integration requires a blend of the proper measurements for talent, processes and systems; use of the measures to create an action plan and; execution of the action plan. Here are some resources to help take stock of all three areas and improve them.
First, The Short Form AFT (Accounting, Finance, Treasury) Assessment provides you with an Executive Summary of how the accounting, finance and treasury operations are working and their capacity for growth. The ‘canary in the coal mine’ measure for most of the processes the CFO is responsible for is the speed, accuracy and insights delivered by the financial closing process.
Second, apply the principles from this article CFO Success Series: Signs Your Accounting Pillar Requires Shoring Up to determine what activities require the most attention and ways to improve your merged team.
Third, use the summary provide with The CFO Foundation - People Process System Assessment Tool to the target company to find areas that may need special attention during the integration. The framework in this assessment provides the basis for rich discussions within your management team to foster growth and improvement.
11. Stabilization and Optimization:
In The Finance Function of the Future, Peter Chisambara CPA, ACMA expands on a McKinsey piece, Finance 2030: Four Imperatives for the Next Decade, with ideas on where to focus your future and how to get there.
“Our training has taught us to solve problems using a logical approach or deductive thinking. The problem with this process is that there is just one possible solution or a limited set of correct solutions and does not take full advantage of the creativity within us. We need to embrace both deductive and inductive reasoning, start asking questions on company performance that have never been asked before, challenge rigid rules and tired frameworks, and consider risks worth taking that we would otherwise not take when thinking deductively.” - Peter Chisambara
In “Leaning Up” the Finance Department, the CFO.University team describes how finance teams are realizing the value of applying lean concepts to their operations, thereby streamlining processes and saving money. The article’s topics include shadow infrastructure, task (takt) time, mapping and customer value.
Here are a couple examples of shadow operations,
“ Through time, companies frequently amass a large shadow infrastructure of inefficient side systems. For example, some employees make a copy of every invoice crossing their desk because in the past somebody may have lost a document and was reprimanded. In another department, someone else has created a spreadsheet that duplicates what is entered into the payment system. All these informal controls impose a huge burden on the company though increased cost and inefficiencies.” - CFO.University
I am a big fan of using a 13-week Cash Forecast model to get to the bottom of how a business is really operating. In any significant business transaction, cash is a component at the beginning, the middle or the end. All roads lead to cash. If you aren’t set up to do cash forecasting start with our inexpensive and insightful 13 Week Cash Forecast Tool.
13 Week Cash Forecast Tool
If you don’t learn at least 10 valuable insights about your merged business, let me know and CFO.University will refund your investment in the tool.
12. Continuous Improvement and Adjustment:
By the time you reach step 12 the integration is complete. The merging or acquiring is now a merged or acquired business. The goal turns to improving and innovating your new operation to create more value for your stakeholders. You have come full circle.
This brings us back to our roots.
To The Four Pillars of CFO Success.
Use the Four Pillars as your roadmap to improving the accounting, finance and treasury operations of the combined business.
Consider reinventing your role by applying the First 101 Days as a Successful CFO to your expanded position. The roadmap will keep you focused on the future and your professional growth.
Good luck in your M&A growth strategy and your individual professional development plan!
Refresh yourself with Part I here, M&A: A Key Cylinder in the CFO’s Growth Engine - Part I
Other resources used in preparing this newsletter:
*Global M&A picks up in Q1 after flurry of large deals - Reuters March 28, 2024
** Don’t Make This Common M&A Mistake - HBR March 2020
M&A Integration playbook - PwC
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