The Strategic Role of the CFO in M&A

As M&A frenzy mounts, CFOs must be the strategic leaders that ensure synergies are realized.

Whenever a market enters a frenzied buying period, good deals get harder to find and mistakes more likely. That’s what we see right now in M&A as the flood of easy money and fears of tax hikes under the Biden administration combine to fuel a record-breaking acquisition spree

Global M&A deals surged to $2.82 trillion in the first 6 months of the year, according to Refinitiv, up 132% from 2020. That marks a 20% increase from the previous record high in 2007. From mega-deals to small acquisitions, M&A activity is on an unprecedented tear worldwide.

In this kind of environment, many acquiring companies are overpaying for what they get and skipping over crucial aspects of due diligence that will come back to haunt them. 

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Higher prices are also making it that much harder to achieve the desired synergies from deals. On the other side, target companies will miss out on once-in-a-lifetime opportunities by not putting in the work to make themselves as attractive as possible to buyers.

On both sides of this equation, the CFO has an increasingly central role to play. The days are gone when CFOs should be limiting their M&A involvement to poring over costs and financial statements, though that is often where their comfort zone lies. 

A McKinsey survey of 200 global CFOs found that cost and revenue synergies in deals were much more likely to meet targets when the CFO was closely involved in the process. Some 76% of companies where the CFO was very involved reported their cost synergies were achieved, compared with 46% when the CFO wasn’t involved at all. For revenue synergies, the difference was 67% to 32%.

CFOs on the sell-side should be ensuring that potential buyers will have reliable information when they dig into the company’s data and operations. They should understand both the seller’s appeal to acquirers and any potential weak points or skeletons that need to be mitigated. 

On the buy-side, CFOs should be mapping the integration strategy with a clear vision of where the combined business is going and the synergies to be gained.

Assuming that deal fundamentals make financial sense, there are several key areas where CFOs should be spending their time to avoid pitfalls that can derail the whole train.

  • Integrating legacy IT systems is among the biggest issues that can bog down deals and lead to missed synergy targets. On the selling side, CFOs should be doing thorough reviews with their IT teams. They must be prepared to explain the target company’s tech journey and the accessibility of its data in a way that holds up to scrutiny. Likewise, acquiring company CFOs need to do a deep dive into how the target company’s tech infrastructure will fit with the acquirer’s base systems and work through a transition plan so that the tech is ready when the deal closes.
  • Cybersecurity and data protection are an increasingly important part of the tech picture for acquiring firms. CFOs on both sides need to make it their job to understand any vulnerabilities and address them.
  • The COVID-19 pandemic has highlighted the importance of having robust supply chains, vaulting the issue up the list of top acquisition concerns. Target company CFOs need to show they have a track record of getting supplies as needed and the logistical competence to keep doing so. In addition, acquiring CFOs should be digging several levels deep to understand the strength of the target’s vendor relationships and any vulnerabilities that could lead to supply bottlenecks.
  • When it comes to supply chain management, environmental, social, and governance (ESG) standards and compliance have grown in importance. Acquiring CFOs need to make it their business to know how potential targets have been monitoring and certifying their suppliers and third parties to ensure their companies don’t inherit any reputational or legal headaches.
  • Tariff and duty compliance is also increasingly on the radar for acquiring firms, reflecting the growing complexity of the global trade landscape and the low level of compliance by many smaller companies. Poor compliance ranges from minor clerical mistakes to egregious errors that could lead to major liabilities for an acquiring firm. As a result, CFOs need to understand the relevant regulations and how closely a company has adhered to them.

Going above and beyond the standard due diligence playbook comes with a downside: it can take more time and lead to unwanted delays. 

CFOs also need to be strategic by designing a plan upfront that considers and reduces the scope for surprises. Deals planned this way with the CFO at the helm will result in higher quality mergers and better returns. 

Lou Longo is a partner and international practice leader at Plante Moran.