The most unique advice on mergers and acquisitions (M&A) that Aditya Mittal has ever heard came from a Roman Orthodox bishop. The CFO of Mittal Steel was considering how to turn around a newly acquired and struggling steelmaker in Romania when the local bishop told him to build a church at the entrance to the facility. “I’m telling you that will work wonders,” the bishop said. Mittal was taken aback, but decided to follow the advice. “We built a beautiful Roman Orthodox church; all the workers got involved in it part-time. And that changed everything,” says Mittal, remembering how the integration barriers dropped away and the plant’s workers embraced a new beginning. Thus a church played a key part in the success that the company, now ArcelorMittal, the world’s largest steelmaker, has had in Romania.
The story makes an important point: Not every deal is done by the same rules, and no one strategy fits every company. There are many ways to succeed at M&A, a fact made clear in 15 interviews with CFOs of leading companies recently published in the strategy+business Reader The CFO as Deal Maker: Thought Leaders on M&A Success. There’s Johnson & Johnson, which lets most of its acquired properties operate independently in a decentralized model, and Henkel AG, which prefers to integrate them to the extent economically sensible. There’s Deutsche Telekom AG, which says M&A success is about capturing synergies, and Merck & Company Inc., which says M&A is about obtaining a stake in promising new discoveries.
Strategy, Synergy, Integration
And yet, for all the differences in how companies approach M&A, our work with financial executives over the years and our interactions with them in the course of conducting these interviews have led us to conclude that all CFOs play three basic and essential roles in the merger process.
The first role is as one of the company’s key merger strategists — the executive who, along with the CEO, ensures that the merger plan meets larger corporate objectives. This means the CFO’s role isn’t limited to ensuring that the deal is financially sound; it extends to posing more qualitative questions to those championing the deal: Is the target appropriate? Why? What could go wrong? CFOs ask these questions not just to understand the potential problems, but also to get a clear sense of the upside, so that when deals go forward, they can articulate the vision and help turn the company’s various stakeholders into believers.
Indeed, one of the strategic decisions in which CFOs need to participate is what sort of deals their companies should pursue. Traditional deal making is only one tool in most companies’ growth kits — and “not necessarily the one that gets the most use,” says Peter Kellogg, the CFO of Merck. Nowadays, many companies pursue partnerships that involve licensing and joint development, manufacturing, and marketing initiatives. “We seek to find a win-win approach that is financially logical,” Kellogg says.
The CFO’s second role is as the deal’s synergy manager. Synergies can take several forms, including cost savings achieved by consolidating operations and increased sales through new capabilities. Regardless of the type of synergy, the CFO plays a key role in creating the postmerger integration plan and identifying the people who can execute it. Good synergy managers know the value of financial incentives, but they don’t leave anything to chance; they also institute monitoring systems that tell them if things are going awry.
This role is increasingly essential, because the window for capturing synergies closes quickly. Thus, to capture synergies in a timely manner, Deutsche Telekom plans the integration before the deal closes and makes a board member responsible for its execution. In the first year, too much is at stake to let an integration effort go off in the wrong direction, according to CFO Karl-Gerhard Eick.