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.
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.
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.