Global corporations have continued to show a strong appetite for acquisitions in the last several years, and 2020 is likely to be no different. More than two-thirds of companies (68%) said they expect the mergers and acquisitions market to improve in the next 12 months, according to the October 2019 EY Capital Confidence Barometer (CCB).
It is less clear that buyers will realize the value they expect from those acquisitions. According to recent Ernst & Young LLP (EY) research, about 50% of global executives said their most recent acquisition achieved lower synergies than initially intended.
The finance function, with a data-driven, analytical, and holistic view of the organization, is meaningfully positioned to increase acquisition success. However, this is possible only if it harvests synergies across the organization over the entire course of integration. Below are three practices that CFOs can deploy that work well during transactions.
A Tangible Deal Thesis
CFOs are typically brought into decision-making on potential acquisitions in the early stages of target screening and selection. However, they often delegate the value creation analysis of a deal to corporate development and commercial functions while focusing on financial diligence and funding structures.
CFOs and their teams, however, can help make the value-creation strategy both more aspirational and tangible at the same time. From an aspirational perspective, CFOs — particularly given their detailed understanding of cost structures — can push the deal team to aim higher by planning larger transformational and value-focused initiatives in the target or the combined organization.
At the same time, through their knowledge of financial data, they can better assess goals and synergies that could be effectively measured — and thus managed and achieved — and those that cannot be. While corporate development typically prepares the synergy projections and develops the deal model, the CFO’s team should pressure-test and calibrate them. It takes both vision and realism to select accretive deals that can materialize.
According to a recent EY “Buy & Integrate” global pulse survey, CFOs named synergy identification as part of the diligence process most key to achieving deal value (53%).
Many companies benchmark costs top-down in the pre-deal phases as they are easier to analyze and quantify, and most likely to be considered by bankers and analysts. However, cost rationalization is generally not the main reason for acquisitions. Including operational and revenue-driving aspects and metrics is essential. This has, in some cases, involved foregoing cost reductions that could imperil revenue or operational improvements.
The CFO can drive deal value by
- Articulating where and how synergies can be realized, in line with the deal thesis;
- Identifying the true cost to achieve synergies;
- Building synergy targets into multi-year strategic plans and budgets;
- Assigning specific owners to each synergy goal and including synergy attainment in their individual annual performance measures; and
- Driving management to define operational key performance indicators that measure synergies and serve as leading indicators.
By accurately and regularly analyzing synergy metrics, the CFO and finance team can warn when integration lags in accomplishing the synergy promised.
Committing to the Street
Companies typically socialize synergy targets at the deal announcement, especially for larger and transformational transactions. This can establish a bar for the integration program to be measured against. In fact, setting more aggressive targets can even help make the integration more successful: EY research shows that 69% of companies that set more aggressive synergy targets met or exceeded expectations.
Unfortunately, it is all too common for companies to announce their synergy targets, but then never provide an update.
Not only announcing synergy targets but also systematically tracking and publicly reporting progress is beneficial for two reasons:
- Knowledge of a disclosure cadence keeps deal sponsors focused on delivering the announced synergies.
- Demonstrating that management has a track record of delivering on synergy forecasts builds credibility with investors and other stakeholders for future acquisitions.
After synergy expectations are declared, deal finance teams should drive the organization to provide external updates quarterly for as long as it takes to declare victory on synergies — which could take two to three years or more for many acquirers.
Keeping the board regularly informed on integration success further establishes the CFO as steward of the organization’s assets. The reporting does not need to be granular, and the finance team should include operational metrics in addition to financial accomplishments.
For example, it may be as important for a media company to report on the numerical growth of its subscriber base and its viewership statistics as to report on the overall revenue growth.
The CFO can play a unique and critical role to drive integration success. Strategic CFOs, with an in-depth understanding of both the company’s strategy and its financial performance, can help targeted assets meet the strategic goals of the company. They can plan realistic synergies before a deal is closed and keep the organization on track to meeting those benefits. Successfully doing this facilitates strategic growth, drives greater value creation through M&A, and increases the likelihood of critical stakeholders supporting future acquisitions.
Lukas Hoebarth is the deal finance leader, transaction advisory services, at Ernst & Young LLP. Juan Uro, is principal, transaction advisory services. Andrei Arkhipov and Tarun Gupta from the EY transaction advisory services practice contributed to this article.
The views expressed by the presenters are their own and not necessarily those of Ernst & Young LLP or other members of the global EY organization.