Best CFO Practices for Achieving Successful Mergers & Acquisitions

According to the Bank of America Merrill Lynch 2016 CFO Outlook, nearly a quarter (23 percent) of middle market companies plan to consider M&A as part of their strategic initiatives this year. Several catalysts continue to lead companies to pursue transactions as an attractive alternative, including the ability to gain access to a larger customer base, expand into a new region, enhance intellectual and financial capital, or address management retention and succession issues.

Given the current market environment, executives are aware that challenges may occur in executing a successful M&A strategy. Some of the top issues we’ve seen companies face include designing a process that generates the optimal outcome, assessing the relative benefits and costs of a potential transaction, and delivering appropriate returns to investors and other stakeholders.

Below are some best practices to follow when considering M&A as a strategic alternative.

 Issue #1: Designing a Process That Generates the Optimal Outcome

One of the M&A challenges companies often face is executing an efficient process that meets shareholders’ objectives while minimizing business disruption. In practical terms, a transaction may offer potential counterparties with the opportunity to consolidate operations, reduce overhead, increase scale, diversify product offerings and create new revenue channels. In addition, many target companies experience the benefit of resolving issues related to management succession and ownership when they opt to become an acquisition target, with family members and leadership splitting sale proceeds rather than battling for control of the company.

Despite these benefits, companies often find it challenging to extract full value for the business. Here are a couple of dos and don’ts to address this challenge proactively:

• Don’t expect that the most logical counterparty or merger partner will recognize the industrial logic, potential cost savings and/or revenue synergies, and be prepared to pay for them in the absence of competitive tension from other interested parties. An M&A advisor can actively collaborate with the target company’s management team to understand the objectives of the various constituents, identify the depth and breadth of the potential buyer universe, manage a disciplined, competitive process, and position the company to maximize value.
• Do get key internal management personnel and external advisors involved as quickly as possible. Shareholders and other key stakeholders will want to understand the implications of an M&A transaction in light of all available strategic alternatives. To the extent that a decision is made to explore a potential transaction, senior management will need to marshal the necessary resources to facilitate the process while preserving confidentiality and continuing to operate the business.
• Don’t be reactive to internal rumors or market leaks. It is important to establish a consistent, cohesive communication plan for senior leaders to address potential concerns and uncertainty from employees, customers, suppliers, etc. without compromising the integrity of the process.
• Do select employees to work on the transaction who are appropriately senior, but who also have access to relevant information across the organization at a sufficient level of detail. These individuals should also be objective about the prospect of a new direction for the company and should be incentivized properly to see the process through to fruition.

Another issue finance executives face is how to assess the costs and benefits associated with M&A activity. This is an important step when evaluating a transaction, and making decisions before a process commences as well as while it moves forward.

To create a complete picture of the benefits and considerations associated with an M&A transaction, CFOs need to factor in savings that can result from integrating two companies as well as any costs necessary to achieve those savings. Some key questions to ask include:

• Will there be an opportunity to consolidate operations and reduce overhead?
• What operational efficiencies exist?
• Can excess capacity be trimmed?
• Will a transaction expand margins?
• Will a transaction result in increased purchasing power?
• Are revenues growing organically?
• Can existing assets support higher business levels?
• What is the ratio of fixed costs to variable costs?

When evaluating a transaction, the best way to gauge the potential returns to investors is to map out the risks involved with executing the company’s existing strategic plan against the those of consummating a transaction at an attractive valuation. This exercise will reveal the most important sources of value and highlight what needs to happen for a transaction to be successful. To maximize the chance for success, CFOs must also have a comprehensive view of the competitive landscape and industry dynamics, which may require initiatives that go beyond traditional financial duties.

Companies assessing an M&A strategy should ask themselves, among other things:

• Is the company concentrated in one industry or business segment?
• Are there potential customers that the company is not currently doing business with?
• Are revenues coming only from the U.S.?
• Is there a change in the mix of revenues in terms of margin and growth?
• Are competitors, customers or suppliers consolidating?

During the remainder of the year, many CFOs of middle-market companies may be considering participating in M&A activity to help fulfill their goals for growth. At the same time, they will face macroeconomic and corporate challenges. Thinking proactively about potential M&A activity and preparing for the possibility will help finance executives keep their companies poised to take advantage of emerging opportunities.

James Rourke is a managing director in the mergers and acquisitions group at Bank of America Merrill Lynch