Whenever a market enters a frenzied buying period, good deals become harder to find and mistakes more likely. This is what we are currently seeing in mergers and acquisitions as the easy flow of money and fears of tax hikes under the Biden administration combine to fuel a record acquisition frenzy.
According to Refinitiv, global M&A deals reached $ 2.82 trillion in the first 6 months of the year, up 132% from 2020. This is a 20% increase from the previous year. 2007 record. From mega-deals to small acquisitions, M&A activity is on an unprecedented tear around the world.
In this type of environment, many acquiring companies overpay for what they get and ignore crucial aspects of due diligence that will come back to haunt them.
Higher prices also make it much more difficult to achieve desired synergies from transactions. On the other hand, target businesses will miss out on unique opportunities by not striving to make themselves as attractive as possible to buyers.
On both sides of this equation, the CFO has an increasingly central role to play. Gone are the days when CFOs should limit their involvement in mergers and acquisitions to looking at costs and financial statements, even if that is often their comfort zone.
A McKinsey investigation over 200 global CFOs found that cost and revenue synergies in transactions were much more likely to achieve goals when the CFO was closely involved in the process. Some 76% of companies where the CFO was heavily involved said their cost synergies had been realized, compared to 46% when the CFO was not involved at all. For revenue synergies, the difference is 67% to 32%.
CFOs on the seller side need to ensure potential buyers have reliable information when they dig into company data and operations. They should understand both the seller’s appeal to buyers and any potential weak spots or skeletons that need to be mitigated.
On the purchasing side, CFOs must define the integration strategy with a clear vision of the direction the combined business is taking and the synergies to be achieved.
Assuming the fundamentals of the deal make financial sense, there are several key areas CFOs should spend their time avoiding pitfalls that can derail the whole train.
- One of the most important issues that can slow down transactions and lead to missed synergy goals is the integration of existing IT systems. On the sales side, CFOs should conduct in-depth reviews with their IT teams. They should be prepared to explain the target company’s technology journey and the accessibility of its data in a way that stands up to scrutiny. Likewise, the CFOs of the acquiring firm should consider how the target firm’s technology infrastructure will adapt to the acquirer’s core systems and work on a transition plan so that the technology is ready to close the transaction.
- Cybersecurity and data protection occupy an increasingly important place in the technological landscape of acquiring companies. CFOs on both sides must make a point of understanding vulnerabilities and addressing them.
- The COVID-19 pandemic has highlighted the importance of having robust supply chains, placing the issue high on the list of top procurement concerns. CFOs at the target company need to show they are used to sourcing as needed and logistical skills to keep doing so. In addition, the acquisition of CFOs needs to dig multiple levels to understand the strength of target supplier relationships and vulnerabilities that could lead to supply bottlenecks.
- In supply chain management, environmental, social and governance (ESG) standards and compliance have gained prominence. Acquiring CFOs should make a point of knowing how potential targets monitor and certify their suppliers and third parties to ensure that their businesses do not inherit reputational or legal issues.
- Tariff and duty compliance is also increasingly on the radar for acquiring companies, reflecting the growing complexity of the global business landscape and the low level of compliance of many small businesses. Poor compliance ranges from minor clerical errors to glaring mistakes that could result in significant liability for an acquiring business. Therefore, CFOs must understand the relevant regulations and to what extent a company has adhered to them.
Going beyond the standard due diligence manual has a downside – it can take longer and lead to unwanted delays.
CFOs also need to be strategic in designing a plan in advance that takes into account and reduces the risk of surprises. Transactions planned in this way with the CFO in charge will result in better mergers and better returns.
Lou Longo is a partner and international practice leader at Plante Moran.