Finance chiefs need to gather a broad range of information (from employees in both organizations) on financials, operations, culture, and talent, in order to get as complete a picture as possible.
When deal levels begin to skyrocket, spurring hasty and competitive movement in the M&A space, it’s important to remember one thing: the volume isn’t just fueling success. It’s fueling mistakes as well.
Move too quickly, and you risk more mishaps per deal than usual; too slowly, and you may miss out on the best opportunity to bolster innovation through acquisition and scale the business to new heights.
So how can CFOs mitigate the risk of making these mistakes, while seizing every opportunity to thrive throughout the deal-making process? Simple: it starts with brutal honesty.
For successful M&A integration, CFOs must be brutally honest with:
The pressure to keep up with and outperform competitors, especially through M&A, can push a CFO to make rash decisions that can be harmful for the company’s short-term and long-term goals.
If you’re looking to your nearest competitor to see what types of deals to go after, you are doing it wrong.
It’s easy to let a “fear-of-missing-out” mentality sway your decision-making process, as you watch industry peers go on buying sprees and start to wonder whether your company should pursue a deal of its own. But making acquisitions for the sake of staying in line with the competition could fuel mistakes and guide your organization in the wrong direction.
So how do you know when a deal is right for your company?
For a successful acquisition, the CFO’s strategic focus must be trained squarely on how the deal will help push the business forward. To nail down these details, CFOs must separate the known from the unknown by asking themselves and their teams tough questions — many, many tough questions. The better the questions, the less likely CFOs and their teams will be to know the answers. Thus, they will need to make assumptions.
Some assumptions will be based on obtainable, verifiable data, while others will be wild guesses made of air. It’s OK to have some assumptions be on solid ground and some that are (at the time they’re made) built on quicksand — as long as CFOs are aware, and never lose sight of, which assumptions fall into which category.
By assiduously curating the assumptions upon which key decisions are being made, CFOs will be more likely to develop and execute against a targeted M&A strategy.
No matter the theoretical gains expected from the union of two companies, the outcome of any deal is uncertain. What if the cultures are mismatched? What if software processes fail to integrate? What if the costs outweigh the benefits?
The best any CFO can do at the outset of a deal is weigh the pros and cons of the merger, using scenario planning as a compass to navigate the uncharted waters ahead and the assumptions discussed earlier as a guide.
To ground these assumptions in as much certainty as possible, CFOs need more voices, more opinions, and more experts weighing in on critical decisions. They must work together with the entire leadership team, and ideally with other voices throughout the organization, at the beginning of the M&A process. Their shared goal will be to create a culture of total honesty and transparent communication — an environment that will help CFOs answer the questions they cannot answer alone.
By challenging the assumption-making process through candid discussion, CFOs and leadership teams can reduce risk and avoid executing deals on partial hypotheses.
They also put their organizations in a better position to check themselves regularly against false assumptions and avoid the traps of confirmation bias or preexisting beliefs. By laying out regular pressure-testing processes, leadership teams can detect early warning signs that M&A assumptions are going off the rails — or that a deal should not be pursued in the first place.
Mergers and acquisitions are disruptive to employees by nature. A change in ownership may cause employees to question their roles. This, in turn, may throw talented employees into survival mode and leave them running for the door.
To prevent this, CFOs and the entire leadership team must ask themselves a series of key questions before agreeing to a transaction: Who are my best employees? How will they react to a merger or acquisition? What new opportunities does the deal create for employees, customers, and other key stakeholders?
To answer these questions, leadership teams must be candid with themselves about differences in culture and mission and find solutions to preserve the true spirit of each business.
The best way to do this is by having an open line of communication with employees at every level of the organization and by understanding the big opportunities they see ahead. This allows CFOs to determine whether (and how) the combined organization may meet or surpass employee expectations — and/or create new, equally energizing opportunities.
Even talk of a merger has the potential to be destabilizing for employees. If word gets out, candid conversations about the exploratory nature of the discussions — along with any details about possible long-term benefits — can be important for retaining talent.
Most employees want to be seen as valued, informed contributors. Treating them this way gives them the security they need to thrive during periods of transition and change.At the end of the day, successful M&A due diligence starts and stops with honesty—honesty about risk factors, opportunities, cultural matches and mis-matches, and big opportunities. When CFOs have honest conversations with stakeholders, they make better decisions and foster the buy-in necessary for success long after the due diligence process is over.
Tim Barefield is a managing director at Kotter, a leadership and strategy acceleration firm founded by Harvard Business School professor John Kotter.