The CFO’s third M&A role is as business integrator — identifying the changes related to personnel, processes, and organizational structure that will best bring out a deal’s value. CFOs certainly play a hands-on role in bringing together the finance organizations of two previously separate entities, but there is also a role for CFOs in integrating departments outside finance.
CFOs and their teams should define the performance metrics and establish the goals that must be achieved to justify the deal’s purchase price. These goals may be tied to the company’s compensation systems, putting the CFO at the heart of incentive design.
CFOs also must ensure the monitoring of progress against targets, a measurement and tracking function that is critical to successful postmerger integration. Finally, in order to reach these targets, CFOs who act as business integrators often sponsor synergy-oriented education and training programs or business literacy workshops that teach employees how to identify the key value drivers within their control and how to attain performance goals.
In fulfilling these time-tested roles and succeeding at M&A, leading CFOs become critical enablers of corporate growth. Here we present the six rules that CFOs should follow to ensure that when it comes to M&A, one plus one will equal more than two.
Shape the Strategic Intent
The CFOs repeatedly told us that all deals must support their companies’ long-term value-creation strategies. To do a deal for a short-term reason, such as meeting a forecasted number, is usually a mistake. “It’s dangerous to target levels of growth because then you may overpay,” warns Johnson & Johnson CFO Dominic Caruso.
Deals can be done to add scale, to position a company in a promising geographic market, to expand a product line, or to gain better control of the supply chain. Sometimes, deals are done simply to add new capabilities. This is true of both Johnson & Johnson, which has completed more than 70 deals in the last decade, and of UnitedHealth Group Inc., which has done almost 100 deals, many of them small. “A lot of them were done to piece together capabilities,” says CFO of UnitedHealth G. Mike Mikan. (See “How to Win by Changing the Game,” by Cesare Mainardi, Paul Leinwand, and Steffen Lauster, s+b, Winter 2008.)
Whatever the strategic intent of a deal, the CFO needs to help shape and communicate it. In particular, the CFO must have the resolve not to be swayed by the market’s initial response. In a bull market, investors sometimes throw up their hats to celebrate an acquisition that, in the long run, will damage or even bankrupt the acquirer. This was common during the dot-com boom. The opposite also sometimes happens; during bear markets, fundamentally sound deals can get an unwarranted thumbs-down from wary investors. As one of the deal’s key strategists and its clear-eyed analyst, the CFO has the responsibility not to be dissuaded by either unrealistic optimism or groundless pessimism, but to stay the course.
Anticipate Your Opportunities
We have all heard it before: “Company X acted opportunistically in an M&A setting.” The implication is that a profitable deal emerged unexpectedly and that the buyer or seller pounced on it. Our experience, however, is that out-of-the-blue opportunities are quite rare, and to the extent that they require quick action, there is often not enough time for a rigorous pre-deal assessment. Extreme time pressure heightens M&A risks, especially those of paying too much and of giving short shrift to essential internal processes. The company that boasts of having made an acquisition “opportunistically” is often revealed later to have simply acted in haste.
This is not to say that speed isn’t important; it is vital in M&A. But it’s an advantage enabled by advance preparation. Such preparation increases the likelihood a company will get in early on an attractive deal and wrest momentum from rival bidders. This is what Bayer AG accomplished a few years ago, after a bid from a rival drug company put Schering AG in play. Bayer ultimately prevailed, completing a deal that extended its holdings from chemicals into pharmaceuticals and that gave it a promising franchise in oncology. But the deal never would have happened if Bayer, which is committed to preparation, hadn’t been working off an existing list of potential acquisitions that included Schering. “We had already done our homework” when Schering became a candidate for acquisition, Bayer CFO Klaus Kühn says. Merck, another drug company, prepares in a different way. It employs dozens of regional scouts whose job is to stay abreast of molecular discoveries at universities and startup biotechnology companies. This increases the likelihood that Merck will be one of the first to know when an interesting partnership opportunity arises.