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By: Keith Haas, CFO FutureView Systems
After a deal slowdown in 2023, M&A activity has picked up, and dealmakers remain optimistic that the market has turned a corner. In my experience as a Chief Financial Officer, the CFO has broad responsibilities across merger and acquisition (M&A) transactions, with many overlooked despite their significance and potential impact on the business. At its core, there are three phases in an acquisition process, 1.) pre-acquisition activities, 2.) planning the integration, and 3.) post-transaction integration.
During the first phase, the CFO is responsible for objectively determining how the company can capture the most value from an acquisition so management can decide how to proceed. In the second phase, which is often the most overlooked aspect, the CFO can take the lead on planning the strategic integration needs and, in the final phase, carry out the integration to ensure a seamless process. Let’s take a closer look at each of these phases a CFO undertakes during a transaction.
During the pre-acquisition phase, the Finance Chief has broad responsibility, typically including financial analysis, valuation, due diligence, negotiation, financing and documentation. These are necessary to get the deal done, but in many instances, finance is fixated on the due diligence and financing, without giving enough attention to the value drivers of the targets’ business and how it will integrate with the acquirer.
While developing analysis and building valuation models, it is imperative to identify the incremental building blocks of value:
An effective approach to flush out these considerations is to begin at the end and develop a narrative for how the business performs after the deal is closed. Sometimes doing this in detail is thought of as unnecessary as “we do not own the company yet” - but I have found that this exercise will inform the financial analysis as well as guide the road map for integration.
Consider the following list of external and internal influences:
External
Internal
This is merely a handful of examples and not meant to be an exhaustive list. Nonetheless, these overlooked instances are where you can identify new opportunities and plan for potential roadblocks that may arise and where you may need to bring in external expertise. A good integration plan will have cross functional teams own various aspects of each - ranging from project management, communication planning, to execution and administration.
While the financial and legal aspects of the acquisition tend to receive significant attention, integration planning is often overlooked. Developing a comprehensive integration plan that outlines the steps, timelines, and responsibilities for merging the two entities is essential. There is some overlap with the pre-acquisition process here and includes integrating systems, processes, teams, and aligning strategic objectives.
As you conduct your pre-transaction analysis, develop a plan for the transition to determine what to prioritize, how to approach integrations and synchronize the teams so that everyone is working from the same game plan. For finance leaders, key areas to investigate include:
1. Plan the integration early – When considering the strategic fit of the target, draft a high-level timeline of the pre close steps and post close integration. Each step will come with its own nuances to determine synergies, identify gaps that require outsourced assistance and recognize which stakeholders need to be involved and who will take lead.
As the deal progresses towards closing, you want to have an actionable plan on how organization and business units will be structured, what systems will need to be combined and what other systems are necessary to consolidate, and all the changes will be clearly communicated with internal staff.
2. Dig deep into revenue drivers – Revenue drivers will differ from company to company, with some operating from recurring revenue from predictable cohorts for one or two product lines and others dealing with transactional revenue from seemingly endless customer types and product offerings.
For example, for recurring revenue or subscription businesses, ask yourself how has the company performed on retention year over year? Is good net retention a result of price increases or a function of cross and upselling? Measuring the target’s ability to cross and upsell will go a long way in determining the depth of the customer relationship, the stickiness of a product, and how it can be sold alongside your own or how you can cross-sell your offerings to the target’s customer base.
3. Anticipate competitors’ response – Don’t forget to consider your competitor’s response once the news of the deal is out. Your competitors will know the bumps and challenges that come with acquisition integration and will seize the opportunity to take advantage of them. Since value is driven by revenue, you will want to partner with your revenue-facing teams — customer success, sales, marketing — to ensure they have the insights they need to combat this onslaught and see your customer retention, cross and upsell tactics through.
4. Focus on expense changes – As you analyze the target’s financials, pay close attention to details leading to expense changes and fluctuations. Make sure you drill down into the line item and transaction details because what might be perceived at the high level to be a more efficient use of capital or increased margins is merely a one-off event-driven circumstance.
For example, if the target shows a recent increase in profitability but revenue growth is flat for the current year, ask yourself the following:
5. Customer and supplier relationships
Acquiring a new entity can disrupt existing customer and supplier relationships. It's important to assess the impact on key relationships and develop strategies to manage the transition effectively. Maintaining open communication, addressing concerns, and ensuring a seamless customer experience is vital to retain trust.
6. Compare compensation and benefits – Benefit plans and compensation are critical to employee retention, and any dramatic changes can have a profound impact on an employee’s desire to stay or leave. You want to benchmark total compensation (salary, bonus or incentive opportunity, equity compensation, and benefits) for similar roles.
You will likely need to either raise your team’s benefits to match that of the acquirer or raise those of the target to meet yours. Another consideration is the cadence for merit increases. If it’s been three years since the last time staff received a merit increase, you will likely need to plan for up to a large percentage increase.
For any issue you identify, consider if it can be addressed with a one-time retention bonus / benefit or if it requires a permanent change, e.g., salary increase. The permanent changes will be more important to the operation of the business but watch out for the trap of identifying too many things as one-time or transitory costs.
7. Need more office space or remote work – Traditionally, companies committed large amounts of resources to office space; however, the prevalence of remote and hybrid work has dramatically changed since the pandemic. You will want to assess if your additional headcount from the target will work remote or require additional office space to operate. This can also be a good opportunity to determine if you need to negotiate a new lease or end one in favor of a remote staff.
8. Cultural fit – Evaluating the cultural compatibility between the two entities is crucial but is often overlooked. Differences in work culture, management styles, and values can lead to integration challenges and hinder the success of the acquisition. It's important to assess cultural alignment early on and develop strategies to address any gaps.
Once the targets’ stakeholders agree to the terms and the ink dries, the real work begins. Your analysis, models and plans from the previous stages will drive the scope of the consolidation and integration process. Clearly communicating success metrics and milestones will help gain alignment between your current operation and new business so everything goes as closely to plan as possible.
Acquisitions can create uncertainty and anxiety among employees in both the acquiring and target companies. It's crucial to prioritize employee communication, address concerns, and provide a clear vision for the future. Retaining key talent from the acquired entity is also vital to ensure a smooth transition and preserve valuable knowledge and expertise. Being transparent and level-setting expectations can go a long way in earning the trust of your employees and prevent any internal backlash.
Ensuring compliance with all applicable laws, regulations, and licenses is critical during an acquisition. Compliance issues can lead to legal liabilities, fines, or damage to the company's reputation. Conducting thorough due diligence, especially in areas such as environmental regulations, labor laws, intellectual property rights, and data protection, is essential. Even if you have extensive experience in these areas, bringing in legal expertise can go a long way in preventing any disruptions for the transaction to close.
After the acquisition is completed, many companies fail to sufficiently monitor the integration progress and make necessary adjustments. System integrations require consolidation that typically require additional, more robust technology. For example, if your target is using a different accounting system than your current company, you may need additional business intelligence and FP&A tools to satisfy reporting and forecasting needs.
Regularly assessing the integration process toward metrics and milestones, identifying challenges, and making timely decisions to address any issues is crucial to maximize the value of the acquisition.
In summary, a transaction can be an exciting time for a finance executive to display a wide range of skills from due diligence and cost management to negotiations and complex integrations. Plan to provide deep and thorough analysis and attention to bring it home successfully. If you are searching for a partner to assist you through pre and post-transaction activity, contact us directly and we'd be happy to help.
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