As the market for M&A activity continues to sizzle, executives and employees who work within the finance function at service firms can’t help but worry about getting burned.
During the first half of this year, mergers and acquisitions reached record levels in the U.S., soaring 60% over the same period in 2014. Low financing costs, robust earnings and intensifying competition have all played a part in emboldening the dealmakers. While mammoth transactions involving name-brand companies (Heinz-Kraft, Charter-Time Warner) have garnered much of the attention, service companies have also been active. Prodded in part by regulators, banks have been shedding non-core assets. Companies such as sportswear giant Under Armour and Cognizant, the provider of outsourcing services, have made acquisitions to expand into the digital healthcare arena. Music-streaming players Rhapsody and Pandora have scooped up related companies, following the example of Apple, which bought a UK-based music analytics firm early in the year.
No sooner has any deal been sealed, however, than talk turns to finance as an area packed with “potential synergies”—another way of saying that significant cost savings will be achieved forthwith by reducing redundancies and consolidating financial standards and procedures. If the promised gains never quite materialize, however, that may be because the combined entities rush through the integration process, overly eager to prove to internal and external stakeholders that the deal is a winner.
So says a finance chief whose company was acquired four years ago in a blockbuster pact. Rather than simply stripping down the finance unit, the CFOs of both companies took their time when it came to analyzing the merged finance function—and how they ultimately needed it to look. Here are some of the unusual steps they recommend:
Identify the target firm’s strongest finance capabilities. Rather than simply accepting the bigger company’s procedures for payroll, accounts payable or other aspects of finance, the target firm should analyze those areas where it excels—then offer to assume those duties for the parent company. It may be, for instance, that the acquirer does have more effective processes and superior discipline when it comes to front-end aspects of accounts payable such as handling purchase orders and organizing an efficient approvals process. But there may be other pieces of the process where the target company has something to teach.
Find places where it makes financial sense to leverage additional volume. As the new entity comes into view, finance executives may begin to see the potential for improved efficiencies everywhere they look. In truth, however, some activities benefit more than others from centralization or integration; changes in physical structure, such as plant or office closings, may appear tempting but turn out to be unproductive. In procure to pay functions, it’s critical to review all contracts, forging new and more economically advantageous relationships with fewer suppliers. In addition, IT integration typically yields bottom-line benefits. If the combined entity is more geographically dispersed than either company had previously been, then there may very well be significant—and surprisingly cost-effective—gains in efficiency from investing in technology to communicate with vendors, customers and employees.
Pick the best leaders—not the easiest ones to choose. As the CFO whose firm was acquired recalls, the executives of the resulting entity decided to centralize several areas including HR, Legal and IT. Rather than simply crowning the acquirer’s top choice to lead each group, the combined executive team agreed to a more deliberate process, soliciting and evaluating input from those who evaluated each candidate’s performance. As with any post-merger decisions involving employees, it’s critical to base decisions on an objective, fair and consistent set of criteria. Acting impulsively—or appearing to—when reducing the workforce risks inciting a stampede of unanticipated turnover, with worthy employees taking some of the deal’s projected value with them.
— Josh Hyatt
The post The Art of the Deal: Three Ways that Finance Can Preserve Itself in the Midst of a Merger appeared first on Performance.