The CFO plays a crucial role in key parts of the M&A process and is a natural choice to assume primary responsibility for M&A transactions in the Executive Board, says Kim Hendil Tegner, partner and head of Deloitte’s CFO Programme.
COVID-19 has not damped down the business community’s appetite for M&A. On the contrary. In the first quarter of 2021, 119 transactions were completed in Denmark, which is one of the highest levels ever. This trend can also be observed in Deloitte’s CFO Survey 2021, in which 37 percent of the responding CFOs working with M&A answer that M&A plays an important or very important role in the development of their company.
Half of the CFOs point out that they primarily apply M&A to grow the existing business as bolt-on transactions, while just under 30 percent primarily apply M&A to transform and safeguard their business looking forward.
“We expect that more and more companies will apply M&A to transform business platforms and that the number of transactions will be at a high level for a long time. Therefore, it is crucial for the CFOs to have an intensified focus on this discipline.”
He points out that the COVID-19 crisis has, among other things, drawn the attention to the fact that companies need to develop their business models, supply chains and digital infrastructure, and this has resulted in an increased focus on M&A in order to get ready for the new reality.
Avoid well-known pitfalls
However, the road to M&A success is not easy. Several global post-transaction studies from, among others, Deloitte and Merrill Lynch show that less than 40 percent of transactions add shareholder value and thus generate a higher return than the cost of capital. Similar studies have shown that this is primarily due to inadequate integration and, secondary, the buyer paying too much.
CFOs should play a significant role in avoiding those pitfalls, Kim Hendil Tegner emphasises, but according to Deloitte’s study, the CFOs have various approaches to M&A.
At one end of the spectrum are CFOs who prioritise to be deeply involved in the entire M&A process. At the other end of the spectrum are CFOs with an increased focus on the more technical elements of the M&A process, thus letting the rest of the Executive Board take care of everything else, including the overall responsibility.
According to Kim Hendil Tegner, however, certain characteristics denote companies that repeatedly prove to be able to buy at the right price and ensure value realisation through well-implemented integrations.
“When taking a closer look at the companies that have been extremely skilled at M&A, it seems that most of them have had CFOs playing a significant role throughout the entire M&A process,” says Kim Hendil Tegner. He elaborates:
“This does not mean that the CFO did everything or that it was the pivotal factor for success, but it indicates that the active involvement of the CFO is part of the answer to M&A success in the long run.”
The firm hand of the executive board
He points out that M&A has a great impact on the entire company, involves many parties and can be a landmark for better or worse. In that respect, it is crucial to keep control, to focus on numbers rather than emotions and to maintain a high degree of discipline, which are all qualities typically matching the CFO’s role in the Executive Board.
“The CFO often acts as the firm hand of the Executive Board, ensuring focus and disciplined execution. The end-toend M&A process includes a number of phases that match the CFO’s natural role in the Executive Board, including objectively analysing targets, negotiating prices, conducting due diligence, securing financing and not least ensuring value realisation during the integration,” he says.
To be able to take the leading role, the CFO must have the necessary business understanding and experience as well as a key position in the Executive Board, Kim Hendil Tegner emphasises:
“The CFO is a natural choice to take the lead of the M&A process in the Executive Board, but it requires the CFO to have and maintain the right business and leadership skills. In any case, the CFO should bear in mind that the capital market will always hold the CFO responsible for a transaction, regardless of whether he or she has the formal primary responsibility. This binds the CFO to take the necessary measures and, if needed, positions.”
Three tips from Kim Hendil Tegner
1. Take the leading role
The CFO plays a crucial role in key parts of the M&A process and is a natural choice to assume primary responsibility for M&A transactions in the Executive Board. As part of this, it is important to thoroughly review the M&A process and make sure that the company has the necessary skills and the right governance before initiating the work.
2. Focus on value and keep control
The CFO must guarantee that the organisation does not get deal fever, pay too much, complete acquisitions that are not in line with the company’s strategy and equity history or take place at a scale and pace that the company does not have the capacity and capabilities to handle.
3. Consider taking on the role of integration catalyst
For smaller acquisitions, the CFO can leave the integration to the business and concentrate on reporting and follow-up. For larger transformative transactions, the CFO should be deeply involved in identifying and following up on the key levers in the value creation plan. In addition, the CFO should consider taking on the role of integration catalyst and take responsibility for parts of the value creation plan, such as pricing and the realisation of back office cost synergy.