Evaluating Growth: The Role of the CFO in M&A
In Q1 2018 UK M&A rose back up to levels not seen since Q1 2007. In their latest update on M&A transactions, EY reported that the value of M&A transactions rose to $120bn in Q1 2018, with a total of 681 deals.
The role of the CFO across the industry spectrum has certainly evolved since 2007 as has the nature of many of these M&A deals; the influence of Private Equity money being the most obvious. What do these evolutions mean for the role of the CFO when approaching and completing a transaction?
We posed this question over breakfast at Aquavit in London, St James’, to 15 CFO’s and M&A specialists. Against the background of some lively, engaging debate, we drew out five key responsibilities that a CFO must deliver against, to ensure an M&A process is not just a transaction, but a good deal.
Discipline
We recognised that having an innovative mindset and maintaining a flexible approach to a deal is imperative to getting the deal done. While it is important to ‘fall in love’ with a target, a transaction should however, never be built purely on emotion or ego. The CFO takes ownership of the due diligence results and valuation.
Of course, no conversation regarding the role of a CFO within a business at any stage of its life-cycle would be complete without a reference to cost control and the importance of ensuring that the cost base is well managed before entering into a transaction. In line with this, we agreed that the ultimate mark of a strong CFO is one that maintains absolute discipline and ensures that there are no surprises.
Culture
Our most hotly debated and impassioned topic and perhaps the subject header for a future breakfast. When we stand back from looking at commercial rationality or necessity of a deal, to understand whether a transaction will be a success, the CFO must understand the psychology surrounding the deal and its cultural impact.
Understanding the different viewpoints of those involved in the businesses is critical to ensuring the long-term success of a deal. While a deal may take on a life of its own to get over the line, we must remember that we still need people within the businesses to ensure that they keep running. Around the table we had many examples of deals that were pushed through only to spend the following months rebuilding the relationships.
The CFO must understand the circumstances of the impending deal, the key players and the competing viewpoints. They must adjust their approach to reflect whether they are buying or selling a business, understanding where the desire to get the deal done is coming from and whether there is any desire at all. This is perhaps most obviously seen in a divestment, where an M&A team needs to achieve a sale, but the people don’t want their business to be sold. The softer-skills demonstrated by the CFO will make the difference between success and failure.
SPA’s may all look similar, but the CFO can add immense value by understanding that the scope and nature surrounding it will be very different.
The Voice of Reason
The CFO’s role lives beyond the deal which may give them the unenviable ‘designated victim’ position, and it gives them the responsibility as the defender; the voice of reason. We know that the modern CFO will be wearing multiple hats, that often can’t be worn at the same time. This is exactly the case when looking at an M&A deal, the CFO must buy-in to the process and be a driving force in the transaction, but equally must defend the business against ambitions that are not aligned to the business.
The CFO must have an informed opinion about the strategic value of the transaction and its ability to create and deliver value to shareholders.
Pooling Knowledge
In an ideal world, a business would have all the time it needed to prepare for an event. The reality is very different however, and time pressures prevent the ideal from materialising. We also know that every deal is different in terms of its complexity, nature and scope, therefore a CFO must be cautious of approaching their next process with the assumption that the same skills will be needed as with their previous deal.
Utilising the expertise around us is incredibly important; namely: drawing on the skills of external Bankers with a view of the market; the insight of Lawyers with their views; and the Accountants to oversee the DD. The true skill of the CFO is identifying those external advisors to ensure that they have a flexible, coherent team, with whom they have a robust relationship, ideally developed before the negotiations kick-off.
CFO’s need to carefully select their advisors and then work together as a team, cognisant of the goals, in an integrated and unified fashion, to steer a deal to a successful conclusion.
Managing Time
As a CFO shifts through the various cycles and demands of a deal, switching from accounting technician, to strategic support, to deal agitator and the defender of logic, the message was clear around the breakfast table, that without effectively managing their time, the CFO can achieve very little. They must avoid surprises in the deal process but critically remain in control of the on-going business, which will and must continue regardless of corporate developments. A deal process on its own can take its toll on a CFO and equally a CEO, leaving the core business to also lose its way without appropriate support.
It was agreed that the best way a business can defend itself and ensure continuity, especially where a protracted and complex deal is on the table, is seek the support of an established interim CFO. An interim who can parachute into the business and provide support, without an agenda or political motivation, delivering stability and then signing off when the deal is done.
Conclusion
The role of a CFO in an M&A deal is hugely diverse. They raise capital, develop strategy, maintain discipline and return value. They must be innovative, flexible, knowledgeable and manage complex relationships between all sides. At the same time, they must ensure stability in their own business during the process, and continuity after the deal is done.
The CFO is the ‘boots on the ground’, they are the one to ‘fill all the holes’; in knowledge, in expertise, in balance. They are the lynchpin around which the flow of information, of feelings and ultimately success or failure will pivot.