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Ten Things FP&A Can Do to Help the M&A Process

  • By Nilly Essaides
  • Published: 1/21/2016
mandaMost FP&A teams are involved in their companies’ mergers-and-acquisition process, often working both with the deals’ sponsors and senior management to assess business and financial assumptions and develop EBITDA or discounted-cash-flow (DCF) valuation models. Here are 10 ways FP&A can improve their companies’ M&A process:

1. Get involved early. “We get involved in the early stages,” said John Fruin, manager of FP&A, in the Treasury, Research and Analysis Division at GROWMARK, Inc. The company has a business development group whose task is to identify potential targets and work with the sponsoring business unit to decide whether it makes sense to pursue the acquisition or merger. FP&A enters the picture as soon as that decision comes to pass. “We look at the target’s financial statements, and perform a preliminary valuation, plus provide the sponsor [e.g. the business unit] input on their assumptions,” he said.

2. Collaborate with other groups. Shane Handsaeme, senior business analyst, corporate planning at Calgary-based Seven Generation Energy, is on the planning team involved in assessing potential investment and acquisition targets. “Our M&A organization has a matrix structure,” said Handsaeme. The economics and financial analysis happens within his group, but there is a development team of geologists and engineers who assist. “We can’t do our job without their expert input into the process,” he said.

3. Rely on past experiences. According to Fruin, FP&A must rely on its past experience to be able to challenge the business units’ assumptions if required and raise other issues that may need to be considered. “Many times there’s a good rationalization,” he said. “But it’s worth digging into. Our data sources range from virtual data rooms that are maintained by investment bankers and attorneys for acquisitions that are up for public bids, to a simple income statement prepared in QuickBooks or maybe even hand-written on a piece of notebook paper by the owner/sole employee of a company that we are dealing with directly one-on-one.”

4. Look at transition cost estimates. FP&A can also add value by examining more deeply the issue of transition and implementation costs: “Are you really comfortable that these are the costs you’re going to face?” Fruin said. Finance may also note legal and other professional fees or ongoing capital expenses that would be required to operate and maintain the business.

5. Review and refine. Once that initial process is completed, at GROWMARK FP&A goes through various iterations to refine assumptions as more financial information becomes available through the due diligence process, “to give us a better estimate of the value of the company,” said Fruin. It then creates a presentation to management that shows the financial benefits and consequences of the acquisition and the impact on the company, using different sensitivities.

6. Ensure information is unbiased. At the European headquarters of Viacom, Senior Director of FP&A, Rich Waigo, often goes after targets that have actively put themselves on the market. “In our case, there’s typically extensive data available from the management of the target company,” said Waigo, “including a long-term business plan.” However, is the information unbiased? FP&A role is to “tear the numbers apart,” he said. The idea is to look at the target’s projections and run them through a different set of filters to assess how realistic they are.

7. Run scenario analyses. Perhaps the biggest value FP&A brings to the table, according to Waigo, “Is scenario based valuation and stress testing any assumptions.” Ultimately, a target wants to get the highest price possible, so often they present a more bullish picture of value and growth prospects. FP&A has to look at it from the acquirer perspective and “get comfortable with the assumptions and projections,” he said.

8. Find synergies.
Next, at Viacom, FP&A looks at how the new business would integrate into its company and whether there would be any synergies that would lead to cost savings and efficiencies. FP&A’s role is to work with senior management team in each business category and access what value could be extracted out of integration, according to Waigo. That includes issues related to system integration. “FP&A is involved from end-to-end,” he said.

9. Provide a fresh set of eyes. One big role for FP&A in the M&A process is providing the business with a broader and independent view, according to Fruin. “It’s about showing the business units what they can expect, based on experience with similar deals – giving them a market perspective,” he said.

10. Perform a post mortem. There should be a process that reviews the expected financial benefits and cost-savings projected in the investment plan against actual results at various intervals, because it’s no secret many M&A deals fail to deliver the value expected. And If not, why? The resulting intelligence will be invaluable when the next deal comes along, and prevent mistakes and help FP&A improve its own valuation processes and checklist of questions.

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