The AFP FP&A Mini Case Study series is designed to help you build up key FP&A capabilities and skills by sharing examples of how leading practitioners have tackled challenges in their work and the lessons learned. In this side-by-side comparison of two cases, a senior-level FP&A practitioner tells the story of working on two very different acquisitions and reflects on how the circumstances of these acquisitions impacted the process of tracking and reporting key performance indicators. Presented at an AFP roundtable, elements are anonymized to maintain privacy and encourage open discussion.
Insight: Faster target integrations gain operational benefits but complicate performance tracking.
|Large and Mid-Cap
|Industrial and Consumer Goods
|Global and Global
|FP&A Maturity Model:
Performance management is the mix of business understanding and finance skill to design and deliver the right information to the right person at the right time in the right format. FP&A develops effective reports for various audiences that are trustworthy and timely, referenced by the business unit when making decisions, and can effectively communicate FP&A’s credibility. Metrics are documented and create high trust and utility to manage business performance.
1) Background. General information about the companies in question.
Case 1: Vertical acquisition by one large, global, industrial of another. A massive deal that transformed one of the largest companies in the world, at a price that was about 40% of the acquirer’s market capitalization. Both companies were publicly traded at the time, and there had been significant consolidation in the industry in recent years. The motivation for the transaction was to add assets that would transform the acquiring company and leapfrog other competitors.
To gain approval from shareholders, external statements were made about what the acquisition was going to do to the company. The CEO had put a target that the deal would deliver several billion dollars of synergies, and when there was some resistance, he increased the promised value by 50%. There was a lot riding on this transaction being successful.
Case 2: Mid-cap consumer good company opportunistically acquires a small competitor. A much smaller acquisition, about 0.2% of the acquirer’s valuation. Both parties were privately held, and the acquiring company was about to be purchased by a private equity firm. Rather than a big strategic acquisition, this was more of an opportunistic tuck-in deal. Essentially, there was some capital available to do acquisitions.
The EBITDA multiple on this transaction was very reasonable, and the acquiring company’s business in a specific market had various challenges. As such, this was an opportunity to buy — at a good price — a competitor who had been successful.
2) The Challenge. The work or difficulty that FP&A had to address.
Case 1: The acquiring company needed methodologies to be able to track and report on synergies. However, the raison d’etre of the deal had been to integrate, not to run as separate organizations with their own profit and loss statements and separate financials.
It quickly became very difficult to separate the performance specifically related to the deal versus what was the general business performance. There were some synergies that were very easy to track, such as the performance of specific assets and the closing of redundant positions (for example, the acquired company’s head office and management in countries where both companies had operations).
But after that, some of the other benefits became quite difficult to track. The acquiring company put together a methodology based on what was in the budgets and what had been committed to; however, this effort to track consumed a lot of resources, and after a certain point, it arguably ceased to add value.
Case 2: Because the deal was such a small acquisition, it did not occupy much of management’s immediate time or attention. As such, while the numbers and operations may have rolled up together, there was little operational impact right after purchase.
3) Approach. How FP&A addressed the challenge.
Case 1: There was an overlay in the budget [pro forma financials], and when the deal was completed, the overlay was dropped down into the budget and people had numbers that they were accountable for. It synced up quite well for a while.
Separately, the acquiring company had a different post-deal review team that had very strong practices of looking back at deals and projects that had been sanctioned and assessing whether they delivered value for the organization. The team would go through the performance of deals that may have been completed five or 10 years ago and present an assessment to senior management. This was not in the spirit of finger-pointing, but rather, in the spirit of trying to understand what happened and how decision-making processes can be improved going forward.
Case 2: It was completely different in every way. The acquiring company had only been in business for three years. Because the target business remained a standalone entity, minimal work was undertaken to integrate operations, and therefore it was easier to track the performance of the business. In addition, the acquiring company didn’t want to impose its processes and ways of working on a company that was actually more successful in-market than it. Rather, the acquiring company wanted to know how the company interacted with customers and operated.
4) Outcome. What came of FP&A’s efforts; what was learned.
Case 1: For those in FP&A at the acquiring company, tracking synergies because very tenuous after two years, because the whole point was to integrate the business, so they stopped tracking. Strategically, the deal was successful in terms of transforming the company.
The post-deal review team used a defined methodology that was reviewed and approved by its auditors and communicated to its board of directors. The methodology included a mix of hard costs that could be tracked and other assumptions that were more subjective. This is a valuable exercise that is different from day-to-day operational management. The ability to look back requires management attention and the interest in learning from your mistakes — and owning up to them if necessary — a practice that may be easier after years have passed rather than months.
Case 2: One unanticipated issue the acquiring company faced was around an “earn out” that was put in the deal but not communicated to the planning team. The acquired management was aiming for this additional stretch target, but the business was not aligned to that target. Essentially, a key member of the management team was following a different target.
5) Discussion. A question-and-answer session among the roundtable attendees.
Q: What should you be thinking about before, during and after an acquisition in order to track value created and value destroyed?
A: You need to be clear about why you're making the acquisition. Then you need to plan for the integration (or non-integration), have the appropriate metrics to track and be clear on what it is you want to deliver. With the example of Case 1, it may have been necessary to track integration synergies because of accountability for the promises made to the markets required to gain shareholder approval. However, after a long period of time, tracking integration synergies may not have added value anymore.
Q: In the case that your company is a frequent acquirer, are you tracking value for each of them?
A: Absolutely not. It's nearly impossible. When a company is good at integration, as soon as the deal closes, it moves the acquired company into its system. As a result, the acquired company is billing on the acquirer’s system. While merger codes help track revenue and expenses, it gets harder over time. The faster you integrate, the more value you can create, but then the harder it is to track.
Private equity buyers want to know how much a business is actually producing. Even if you say that the company is profitable, how do you break out that profitability? A lot of times, acquisitions are actually less profitable in year one due to a variety of deals with founders and key individuals. Then, over the next two to five years, they become positive EBIT (earnings before interest and taxes). You would have to balance the time frame of analysis before making a decision, but no one has time for that.
Q: After a certain point post-deal, do people simply stop caring about tracking synergies and move on?
A: Generally, that seems to be the case, and it’s a double-edged sword because you want to integrate quickly, but then you lose that visibility. With a larger deal, however, a lot more reporting is involved because it’s such a huge investment, which means counting on the synergies for the value to become something that is worth the investment.
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