Don't Fear the Merger
In recent months, we have seen a real boom in merger and acquisition (M&A) activity across several different industries. In telecoms, for example, the Alcatel/Lucent and Telefonica/02 deals spring to mind, and Deloitte counts 12 cross-border financial services mergers over US$3bn in the last two years. In 2005, a Bain and Company survey of 960 global executives found that ‘acquisitions will be critical to achieving [their] growth objectives over the next five years’.
Many perceive the world of M&A to be rather glamorous, with sharp-suited lawyers and bankers signing multi-million deals. But once all the glitz and excitement has subsided, and the bankers and lawyers have taken their fees and moved on to another project, what happens next?
You can be sure that it will fall on the shoulders of someone – usually the CFO – to deliver all the benefits that were promised to the market. Although a talented and capable individual, the CFO responsible for ensuring these savings can often be plunged into uncharted territory by a merger.
It’s no wonder they feel the pressure: according to Deloitte, between 50-70% of mergers fail to deliver shareholder value so the heat is on to deliver savings against the odds. Speed is of the essence too. Accenture revealed that for an acquirer expecting to reap US$500m in yearly cost savings from an M&A transaction, a mere one-month delay reduces the net present value of the deal by more than US$150m (assuming a 10% cost of capital). A seven-month delay costs nearly US$1bn in lost value, or approximately US$3.5m per day. With figures like these, it is no wonder that many CFOs approach a merger with a sense of trepidation.
It certainly sounds like an almost impossible task, but should a merger really strike so much fear into the CFO’s heart? Not necessarily. In fact, forward-thinking CFOs could actually view mergers as a golden opportunity to not only progress the success of a company, but also make a name for themselves and delight their bosses. The question is ‘how exactly?’
First, before the merger, successful acquirers need to ensure that their due diligence efforts incorporate fast, accurate assessments of both short- and long-term success. Superior information management technology is crucial, as companies with access to accurate, reliable data are able to precisely measure not only the potential synergies, but also the lack of synergies that need to be addressed.
Best practice is to implement an information management approach that accommodates scenario planning, i.e. one that enables reporting requirements to be continuously modelled to examine ‘what was’, ‘what is’ and ‘what could be’. In doing this, both the business and IT heads are able to examine what the new business model would look like post-merger. This helps to avoid unpleasant surprises and costly delays after the merger has taken place. It also means that the project can gradually be extended to other areas of the business after the event.
As well as looking forward, the capability to look back is important, especially in this heightened regulatory climate. It is imperative that the CFO can report on old information using the structure that was appropriate at the time, while running the business on a post-merger model. These historical structures are necessary for compliance initiatives and trend analysis; therefore companies must keep track of business model representations pre- and post-merger.
In order to attain meaningful reporting information post-merger, the CFO has to both see how the new business is performing in order to develop financial and market results, and appease stakeholders as they eagerly await information on the merger’s success. But when two companies of significant size come together, merging IT systems overnight is clearly impossible. A solution is needed that allows companies to rapidly integrate management information from disparate systems without the need for standardization or invasive change to source systems.
It can be tempting to choose one company’s system over the other’s but this will only serve to alienate both customers and employees, according to analysts. Moreover, any CFO who attempts this will soon realize that rapid standardization is pretty much impossible – there will always be diversity in large organizations due to varying data structures and systems. It is more important to be able to have a cross-company perspective through technology solutions rather than waste time on the never-ending task of standardizing systems through the company. This is all very worthy, but what you need immediately is to understand the gross margins of all the product lines, channels and global accounts across the newly acquired entity. Switching off old systems can wait.
Clearly, any M&A signals a time of upheaval within a company. But this isn’t the only time major changes will affect operations, so the merger provides an excellent opportunity to make sure any systems and processes to acquire post-merger data are flexible enough to cope in the future. This is particularly relevant if the market is at a turning point with the potential to move in another direction.
Companies would do well to look towards one of the largest mergers in recent years – Halifax and the Bank of Scotland’s venture to form HBOS – where they chose a solution that gave them a consistent view of procurement data held in disparate systems. HBOS was realistic enough to recognize integrating operations and IT systems from different divisions was a long-term endeavour. But implementing an iterative approach, i.e. taking the project in bite-sized chunks, their business users were able to gain the necessary insight to drive significant cost-savings.
Any merger or acquisition of any size is going to present significant challenges when it comes to integrating the disparate systems of the two companies involved. However, with the right approach, CFOs can make it the defining moment of their career.