Led by AT&T’s takeover of Time Warner and the recent bidding war for 21st Century Fox between Disney and Comcast, a wave of business upheaval in the media and entertainment industry is in full swing.
That industry is far from the only one zeroed in on mergers and acquisitions. Energy and power, health care, financial services, technology, and others are experiencing big increases in deal volume. A record $2.5 trillion in M&A activity was announced in the first half of 2018 alone.
For American companies, this wave of potential mergers can be attributed to the current Business 4.0 environment, one primed with a strong economy and a windfall of cash generated by federal corporate tax cuts.
And with digital technologies enabling accelerated transformation, M&A is becoming an increasingly appealing way for companies to deliver growth, improve productivity, enhance user experience, and more.
However, even with a strong economy and the promise of new and emerging technology-driven capabilities, the true potential of a merger or acquisition can be realized only when a strategic vision is established and executed properly to meet pre-determined and communicated objectives.
The CEO is ultimately accountable for the busi
ness strategy and success (or failure) of an M&A event. However, the CFO shares the responsibility for uncovering synergies stemming from the two entities’ integration and evolution, and orchestrating the realization of such synergies.
Synergies can include cost savings from eliminating duplicate resources, generating new revenue streams, or lowering operating expenses by implementing better processes and technologies.
Whatever the synergy sought, what it is and how it’s captured should align with the vison of the combined organization — whether financially, culturally, or operationally — to make the deal worthwhile.
The process of identifying the synergies for each unique M&A event starts by defining future-proofed objectives for the deal. CFOs should play a key role in this process to help ensure proper investments are made in the right people, processes, and technologies to meet those objectives.
For example, as digital technologies continue to emerge and develop, CFOs should work with their CIOs and other business leaders to ensure the combining entities are investing in the tools and technologies that will accentuate the strengths of both organizations, carrying the “NewCo” long into the future.
This is the ideal time to look at select transformation, versus simple integration. Adopting intelligent, agile, automated, and cloud-based technologies, as well as leveraging a company’s full ecosystem including partners and suppliers, will provide the right data and insights to manage risk when creating new customized products and services.
Future-proofed objectives should then be folded into an investment thesis — an actionable synthesis of the analysis for how the envisioned NewCo could perform.
This strategic vision typically outlines executive stakeholders’ assumptions and guidelines relative to the NewCo and how the two entities must come together to deliver against the acquirer’s goals. It articulates the must-have business synergies and must-do actions for realizing the expected results.
Over the course of an M&A event’s life, this vision is presented in two comprehensive, fact-based integration planning and synergy management tools:
- The target operating model: The business architecture — or people, products, processes, and technologies — of the combined enterprise
- Net value calculation: Expected return on the investment made to achieve the targeted synergies, such as higher revenues and lower expenses
Typical responsibilities of CFOs during an M&A event include financial and tax due diligence, bank terms-and-conditions negotiations, shareholder value protection, and much more.
But as an ever-increasing number of companies take the leap into the Business 4.0 world, the responsibilities of CFOs during the M&A process are evolving beyond the traditional role, such as being the optimizer of net value delivered.
CFOs need to use integration planning and synergy management tools as living documents to illuminate critical hypotheses and manage risks before, during, and after a deal.
As these tools are developed and continuously refreshed along the M&A lifecycle, it’s essential that the CFO understands the shifting benefits and costs associated with each change. This requires collaboration with executive leaders in both companies, including those responsible for systems, data, and technology.
CFOs also must learn a new set of questions for internal stakeholders. What digital technologies are needed to achieve faster-to-market processes? How should business functions and services be structured differently to enhance customer experience?
How can emerging technology alter the vision of the newly combined entity for non-linear performance? Who needs to own and operate digital technologies to ensure faster delivery?
It’s essential that CFOs work side by side with C-suite colleagues to understand how answers to questions like these shift over time, especially given their impact on the deal’s expected synergies.
As M&A events continue to shake up industries and the overall competitive landscape, more weight and responsibility will fall on the CFO’s shoulders. Beyond the traditional roles, CFOs and finance teams will have to evolve to take on a broader vision of what financial success looks like in a Business 4.0 world.
More and more, this success relies on a future-proofed technological but business outcome-focused foundation. The CFOs who understand the value of this to the business will be the ones leading the most successful integrations and enterprise transformations for corporate sustainability.
David Jordan is global head and managing partner, consulting and services integration, for Tata Consultancy Services.