Mergers and Acquisitions for CFOs

(For links to the presentations, click here.)

Don Zambarano, Partner, Transaction Services, KPMG LLP kicked off our discussion by framing the favorable market for deal activity. Cash-rich balance sheets and available debt, combined with opportunities to accelerate revenue growth and broaden product portfolios, are expected to drive M&A this year. 

However, while the market is ripe for M&A deal activity, companies still struggle to create shareholder value throughout the transaction. A recent KPMG commissioned global study indicated that 69% of surveyed corporate buyers did not enhance shareholder value from acquisitions made over a 2.5 year period due to:

  • Inadequate strategic and commercial due diligence
  • HR and people issues
  • Overvaluing synergies
  • Inadequate integration
  • Lack of sponsorship and functional group involvement
  • Inadequate M&A process and lack of a formal M&A playbook

With this framework in place, the rest of the panel offered their experience and guidance in addressing value erosion issues before, during and after the transaction.

Mary Henry, Strategy and Partnerships, Systems Software, IBM, who has experienced both the buy and sell side of the M&A process, advised CFOs who are preparing to enter a M&A transaction to:

  • Get Organized Now. Make sure all of the preparations are in place for a smooth information flow between the buyer and seller, including an assessment of your finance team skills, up-to-date audits, conversion of all of your paperwork to electronic format, understanding your licensing both in and out of your company, your source code, and so on. Henry also advised that companies ask for a sample due diligence list to help prioritize your resources.
  • Listen To Your Team. Whether it’s your board, your management team or your employees, listen to your team carefully to ensure that they are ready and on board to be acquired, or vice versa. As Henry stated “Never, under any circumstances, underestimate the effect of the culture clash.”
  • Keep Business Moving. While the negotiation and due diligence process will be a drain on your time and resources (don’t underestimate the time that you’ll spend communicating with your current investors or potential buyers!), maintaining your corporate value means that your business must continue to run as usual.
  • Be Flexible. Most importantly, Henry stressed flexibility as key to a good experience, and recognize that you can’t make the buyer go any faster than they are, especially if they’re a much larger company. However, it’s also up to you to not be a bottleneck and slow the process down.

When working through the legal and finance issues of your M&A transaction, John Egan, Partner and Co-Head of the Technology Company Practice, Goodwin Procter, offered this advice to CFOs:

  • Be Prepared to Explain Your Stock Option Granting Practices. If you are being acquired, be aware that buyers will scrutinize your stock option granting practices under Sec. 409A.
  • Be Knowledgeable of Your Deal Structure. Asset purchases and stock purchases are mostly favored by the buyers, but each can present tax and consent issues for sellers. Licensing transactions and ‘acqui-hires’ are also on the rise. Earn outs also present a host of issues for the acquired company, and it is recommended that the metrics and milestones are clearly listed out and bought into by both the buyer and the seller. (You can read a recent Wall Street Journal article covering the issue of escrows and earn-outs here.)
  • Fully Diluted Equity Only, Please. While the per share purchase price is easily determined in public deals, buyers of privately-held companies usually seek to buy the fully-diluted equity, not just the outstanding shares or even just the vested options.
  • Know The Buyer’s Integration and Retention Processes. On the matter of employee retention, be aware of what your buyer’s integration and retention processes are, and push to move them along as quickly as you can. And if employee retention is a condition of the purchase, get a covenant on the benefits and ensure that offer letters are issued to key personnel as soon as possible.

Finally, when reviewing successful post-merger integration techniques, Richard Booth, VP of Finance for Nuance Communications, who has managed 37 material acquisitions since 2008, offered this advice for CFOs:

  • Focus On Deal Logic and Value Drivers. When planning your integration process, focus on the deal logic (taken from your investment thesis) and your value drivers (shareholder value, revenue, R&D efficiency, operating profitability, etc.) By keeping these goals in mind early on in the planning process, you can better ensure an integration process that does not erode your value.  
  • Set Clear Integration Priorities. Prioritize your customers, organization and people in your integration based on the value drivers described above.
  • Start Transition Early and Execute Rapidly. As Booth stated, “I’ve never heard someone say that we moved too quickly when integrating a purchased company into the fold.” This includes a clear implementation planning process which outlines your performance standards, detailed descriptions of the new processes and organizational design, clear accountability for each step in the process, process measurement and reporting, and of course, the resources (capital expenses) required to execute the integration.

But most importantly, the panel stressed one key piece of advice – never be afraid to ask for help. M&A transactions are some of the most stressful and complicated processes that any CFO will manage, and while all deals are inherently unique, there are best practices that have been proven to maintain corporate value.

To download copies of the presentations reviewed, click one of the following links:

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