Minding the gap: Why CFOs should “own the integrity” of the M&A process
M&A is catching fire. Even before the news of the $130 billion Dow-DuPont merger, on the heels of the $150+ billion Pfizer-Allergan deal, 2015 has been the biggest deal-making year in history. The sobering reality, however, is that we know that between 50 and 83 percent of M&A deals fail to boost shareholder returns. I had the opportunity to reflect on this red-hot topic during the latest MIT Sloan CFO Summit in Boston, Mass.
Now, we all know these conferences run the gamut all the way from memorable and actionable to complete time-wasters. Fortunately, this was one of the former variety! Over 600 CFOs met to explore what “Innovation and Expertise” means in the context of financial leadership. Most interesting to me, however, was an M&A panel discussion, entitled “The Arc of the Deal” led by a diverse group of financial professionals well-versed in the intricacies of mergers and acquisitions.
“Between 50 and 83 percent of M&A deals fail to boost shareholder returns. “
“The Arc of the Deal” discussion focused on what the CFOs of acquiring companies, the rest of their C suites, and their boards can do to change this pattern by better preparing for mergers and acquisitions, and seeing them through to success.
The panelists broached the tough but obvious questions directly: Why the high failure rate? Are there gaps in the process, balls dropped? Does this have to be the case? I found the comments made during this discussion revealing and important enough to summarize for my clients and others interested in M&A. The result is what I would call a “prescription” for closing critical gaps in the process and improving the odds of a successful deal.
High board involvement in the business
Nothing truly takes the place of sweat equity. A 2014 McKinsey study of 770 board directors found that those who reported having a high level of impact on their companies’ success spent 40 days per year working on company matters vs. only 19 days spent by those who thought they had a moderate or low impact on their company. The high impact group spent twelve vs. four days on strategy issues, seven vs. four on performance management, and six vs. three on M&A matters. Very telling.
Jeffrey Poulton (CFO, Shire Pharmaceuticals) explained his company’s commitment to ensuring that boards and managers are on the same page strategically. “At every board meeting there will be a slot of time for business development discussions,” he explained. “If you are going to do the kinds of deals with the frequency that we do, it has to be part of the fabric of how management interacts with the board.”
A more engaged board, working more collaboratively with top management to align strategy, leads to better acquisition selections and sets the stage for more successful integration.
Minding the boardroom-backroom gap
Assuming we plug the gap between board level and top management strategies, another gap – between the board/C suite and the deal-making team – can still threaten to derail the success of the deal. Too many companies’ M&A teams are not integrated with board and CEO-level discussions about strategy, but are off in a corner processing the deal prospects that cross their desk. In this scenario, misalignment between goals and strategies happens all too easily and optimal value creation suffers as a result.
CFOs who are strong communicators can be instrumental in assuring that strategy remains aligned between the boardroom and the backroom.
No longer bean counters
An additional obstacle to successful deals may lie in a carryover of the traditional mindset of the CFO role as being more limited than current reality warrants. In a process that involves melding the finances, people and operations of two business entities, the CFO is the logical strategic leader.
CFOs are in the best position to see the entire arc of the deal, from strategy to targets to an actual deal, valuation and integration. Andy West (Director, McKinsey & Co.) expressed it another way when he said that “CFOs don’t have to own the process, but should own the integrity of the process.”
The best deals seem to follow when the board and CEO deputize a strong CFO to shepherd the resources from start to finish.
Tying rewards to the entire arc of the deal
Still another damaging disconnect occurs between those who identify acquisition candidates, prepare and close the deal, versus those who handle integration. The best approach is to have a dedicated, cross-functional team in place that comprises people at both ends of the process. That way, they are not performing some kind of frantic relay race hand-off.
“Rewards need to be affixed to the success of the end results, not to the number or size of the deals signed.”
In a Wall Street Journal article about the CFO role, Dr. Mitchell Marks, professor and consultant with San Francisco State University College of Business, described the impatient mindset of many dealmakers. “They’re looking at the next deal and lose oversight,” he explained. “They drop integration into operating peoples’ lap, thinking, ‘nowhere on my list of performance goals is integration…that is a distraction to what I think is real work.'”
Rewards need to be affixed to the success of the end results, not to the number or size of the deals signed.
Early integration efforts.
You need to put the right integration resources in early. In reading about the imminent Dow-DuPont merger, we can easily imagine how much preparation went into integrating these two giants. Dow has wanted this merger for 11 years, and the fact that the companies made clear advanced plans (to spin the new company into three specialized companies) is predictive of high odds they will succeed.
The “Arc of the Deal “panel advised that when the dealmakers and the integration folks work together, do their homework before the deal closes, and then meet quarterly to ensure plans stay on course, continuity gaps can be avoided. Mary Henry commented on this, saying, “The companies that have done it well start the integration conversations well before they have a deal closed, by having dedicated people working on the integration.”
Dr. Marks echoes this, saying that, historically, “people just wasted the time between the announcement and the closing.” With the complexities of integrating IT systems and financial reporting systems, as well as the softer but vital task of getting a fix on the company’s talent quotient, reporting relationships and compensation plans, this is deadly. Intuitively, failure to anticipate these projects and hit the ground running is going to delay positive earnings and potentially undermine long-term success.
Advanced preparation and smooth integration of people, culture and systems are a powerful antidote to the early downward pressures any disruption creates.
Clear and timely communication of intent
Hand-in-hand with this integration failure is the tendency to allow the sheer volume of tasks to obscure the primacy of the people element. Too many companies fail to conduct thorough human capital due diligence of the acquisition (homework, again!), and wind up kicking the can down the road when it comes to decisions about leadership and headcount changes.
Poulton talked of the challenge of getting key people in the acquisition to stay, explaining that at Shire, “We now plan for that…clarity is what people want.” “Our goal now, when we announce a deal, is that the day the transaction closes, we let people know what the plan is on an individual basis,” he said. This is a far cry from the reality of how most deals go down.
Mary Henry expressed the danger of leaving a gap in this crucial area: “When integration is an afterthought, ‘silence is the enemy’ when people are being acquired.”
When all is said in done, if you are not retaining key talent and the history, expertise and goodwill that talent embodies, you are buying a tenuous brand in a fickle market, plus some assets you may not know how to effectively employ. As in most things, it pays to do the right thing, figure it out early, state your intentions and move forward.
In “The Arc of the Deal,” what started as a look at the CFO’s role in M&A deals blossomed quickly into a broader scrutiny of the whole process. As in the course of an arc, however, it came back down to an endpoint, in this case a strong takeaway for the CFO: Don’t limit yourself, don’t assume someone else has a better grip on the big picture than you do. Brian Cooper, (CFO, Everyday Health) expressed it well: “I see the CFO as playing a quarterback role, in seeing all the pieces, making sure that the board is aligned, bringing their perspective to the deal, working closely with the deal team…and working with the legal and business issues.” Add to this the integration and human capital pieces, and minding all the potential gaps is no sideline role.
The ball is dropped when CFOs fall back and assume others are tracking it – rather than truly owning the integrity of the play.