CFOs should also ensure that every manager involved in capturing synergies has skin in the game. Four-fifths of the CFOs we interviewed said they create such incentives. ArcelorMittal CFO Mittal, for instance, instituted a “very simple” yet effective compensation plan that tied bonuses to achievement of some of the synergies expected in the merger that transformed Mittal Steel into ArcelorMittal. Those who didn’t achieve 85 percent of the budget, which captured the synergy and value plan, got no bonus.
Some CFOs ask managers of acquired companies to participate in discussions about the available synergies as a way of getting their buy-in. This can be a smart way to mitigate the risk, present in all acquisitions, that key people will leave and morale will suffer, hurting financial results and causing customers to defect. The Italian energy giant Enel SpA did this when it bought Endesa SA, a Spanish counterpart, in 2007. Instead of unilaterally imposing a set of cost-control goals on Endesa, Enel assigned one Enel manager and one Endesa manager to collaborate on individual synergy targets. “You can’t just walk in and say, ‘You need to achieve €600 million [US$930 million] in synergies,’” says Enel CFO Luigi Ferraris. “You have to involve [the acquired company] in the process of making the analysis and coming to the same conclusion.”
Finally, if a deal’s synergies are not achieved, it often falls to the CFO to explain why. This is another task that should not be put off, if credibility with the capital markets is to be maintained. In these cases, the CFO should communicate as quickly and clearly as possible the root causes of the problem, the corrective action being taken, and revised estimates for the deal’s economics.
Build Trust in Future Success
Much of the acquired value of a deal hinges on existing employees. People maintain operations, own trusted client relationships, and develop market insight. And yet in almost every acquisition, key staff members and managers react with concern to news of the transaction, wondering what it will mean for their future. Many workers lose focus; some consider leaving, and others do leave.
CFOs can mitigate this risk in a number of ways. For example, they can resolve staff uncertainty as expeditiously as possible. This means making fast-track decisions about organizational structure and staffing, as well as about governance and decision rights. With certain acquisitions, it may mean dealing forthrightly with labor issues. But the aim is always the same: to cut short internal speculation and reengage people in the business as quickly as possible.
Making postmerger management appointments on the basis of merit can be a powerful retention tool. Key staff members usually take stock of the acquiring company’s discipline and objectivity before deciding whether to stay. Mittal remembers that after the mammoth acquisition that brought Arcelor to Mittal, the onetime Arcelor people were standoffish, expecting “to be second-class citizens.” They were in for a pleasant surprise. “We operate as a meritocracy, on an honest, transparent, and fair basis,” Mittal says.
Don’t Compromise on Control
For all their far-reaching responsibilities during an acquisition, CFOs ultimately must lead and reshape the finance function itself. This can be a huge challenge, because the reporting processes, information systems, and control tools of the acquired company often differ sharply from those of the buyer. And time is short — the new company generally has to meet deadlines for its upcoming quarterly statements, and the control and compliance requirements must not be compromised.
We find that leading CFOs break the finance integration challenge into three phases: a first phase focused exclusively on fulfilling external reporting requirements; a second phase intended to establish a set of common financial practices; and a third phase aimed at transforming the entire finance function into a world-class operation, while consolidating operations.