Mergers and acquisitions are hard on FP&A. When two dozen practitioners gathered at Monday’s AFP 2019 FP&A Roundtable to discuss their roles and experience in M&A, there was no discussion of modeling economic benefits and strategic rationale. Instead, four themes came through clearly.
Deal structures and FP&A involvement vary.
There are many different flavors to M&A, and the negotiation for each will differ as well. For example, buying small companies that operate independently, private-to-private transactions, and a publicly traded firm acquiring another will each be handled differently. A banker in attendance explained how senior leadership at his organization was in talks with other company for about 10 years before finalizing an acquisition. In contrast, an FP&A practitioner for large consumer product company noted that once, he “had one month’s notice” prior to a deal. Some deals are negotiated among a small group due to secrecy and delicacy of the information; FP&A may be involved or not, often depending on the strength of the internal corporate FP&A group. For those who get short notice, one CFO noted, “there are reasons for that, and that is the way it is.” The best you can do is have playbook and process ready to execute.
Culture eats (M&A) strategy for breakfast.
While this is a play on the famous Peter Drucker quote, it essentially captures the sentiment of the room when asked to identify the most common pitfall for M&A transactions.
Deals may take on a momentum of their own that is hard to stop. “Often, people are also bought into the process… [it’s like] you have to go through with the wedding because the checks have already been cashed,” said one attendee. “You cannot stop the process.”
Then, when the hard work of integration takes place, people leave due to any number of reasons: fear, frustration, change, not liking the new circumstances, etc. “We offered 50% pay increases to the acquired employees and they still left,” a former CFO recalled.
The practitioners offered up some advice:
- The better you can define and explain your culture to the acquired staff, the better they will understand the change to come and hopefully appreciate the values of the new company.
- Include HR in the evaluation team, with the ability to examine and explain role alignments and read the culture of other company.
- Look out for signs of culture clash, including missed deadlines to deliver data and make progress.
- Assume and model headcount reduction of at least 25% in affected teams, and associated productivity loss.
- Have a blueprint for M&A to present an orderly expectation of events and diligence.
- Consider the earn-out incentives of key players.
Consolidated reporting will be hard.
“It has been 12 months since the merger and we are still working on getting our reporting right,” said one practitioner, as heads nodded in understanding and sympathy around the room. Systems don’t integrate, and even ledger accounts with the same name have different meanings and elements. Yet this operational pain contrasts with the demands of leadership and investors who require that finance present consolidated reporting “on day one” after the deal closes. Finance makes manual adjustments and ugly contortions to make the numbers work; this may be exacerbated if the time between deal announcement and close is especially short.
A few more pieces of advice:
- Standardize a template for reporting so the acquired team knows what is expected; deploy members of your team to coach the new team.
- Focus on the roll-up reporting items that matter.
- Beware of change fatigue; start with easy reconciliations like payroll.
Get deal experience.
For all the frustration, deal experience is an important part of the finance resume. Deal volume was up last year, and the expectation is for further acceleration due to cheap capital, outsourced R&D, and the need to gain scale quickly. This is becoming a required skill for finance development.
AFP 2019 may have just wrapped up, but AFP 2020 in Las Vegas will be here before you know it. Interested in speaking? Submit a session proposal for the conference today.