Corporate Board Member magazine, in cooperation with Deloitte, conducted a survey in Spring 2013 to evaluate the alignment of viewpoints about risks held by chief financial officers (CFOs) and the members of the boards of directors in relation to merger and acquisition (M&A) efforts. Analyzing these results can help management find common ground on some significant issues to enhance their awareness of the risks their organizations may face during their M&A activities.
Overall M&A Strategy
In the first section of the survey, respondents were asked to match their organization’s short term M&A strategy to different scenarios. Each of the scenarios represents a different M&A strategy that a company might undertake. Throughout the different scenarios, CFOs and directors were closely aligned, with the most respondents choosing to seek smaller, strategic deals over the period of next 12-18 months. During the period of economic recovery, these kinds of deals seem more reasonable to management than the ones with high risk and uncertainty. The second most popular choices by both groups were responding to any opportunities that arise and seeking major transformational deals.
When answering the question about primary M&A objectives, the respondents were given seven choices, where more than one answer could be selected. Directors and CFOs disagreed significantly when responding to this question. The majority of CFOs identified product/service differentiation as their primary M&A objective, which reflects their position in the company and their direct efforts to create new products and increase the company’s market share. Directors differed from CFOs by almost evenly choosing two other options as their key objectives: pursuit of cost synergies or scale efficiencies and expansion of existing geographic market. As noted in the report, this divergence again closely correlates with the director positions and their ambitions to move the company forward as a whole.
M&A Funding Sources
The CFOs and the directors were very closely aligned when asked about the primary sources of funding for their M&A investments in the near future. Out of the five choices they were given, using cash as their primary funding source was by far the most popular choice for both CFOs and directors. Slightly more than half of both groups chose cash more than any other option provided. Although agreeing to using debt as the second choice for M&A investments funding, the percentage of CFOs choosing this option was significantly higher than the percent of directors. None of the other choices were represented by significant figures. Both groups ranked issuance of new equity as third among the choices of funding.
Greatest Risk Concern in M&A Success
Both directors and CFOs clearly agreed that the failure to effectively integrate merged or acquired entities was their biggest concern when assessing the overall merger and acquisition success. The other significant risk concerns relate to external factors affecting M&A transactions, such as legislative and economic changes.
Greatest Risk to Integration
Approximately half of the directors and CFOs identified cultural alignment as the biggest risk facing any M&A efforts and therefore cultural integration is a very essential factor in an M&A success. This result ties back to concerns about the risk of integration, given cultural alignment concerns directly impact the ability to successful integrate organizations. The fact that both of these groups recognize this risk as very significant can help organizations avoid problems and increase the odds of success from M&A transactions. This report points out the importance of having a separate team overseeing just the integration activities.
The other two noteworthy risks chosen by the respondents were customer retention and synergy capture. CFOs seem more concerned about retaining customers while the directors see synergy capture as the second greatest M&A integration risk. This difference may be triggered by the different primary goals represented by these two parties.
Greatest Concern in Valuing a Target
The survey finds that CFOs and boards are aligned about the risks of estimating the value of a proposed target. Directors and CFOs clearly agreed that overstated revenue forecasts were their number one concern in accurate M&A target valuations. Most M&A transactions are evaluated based on the company’s ability to grow and therefore accurate forecasts can help companies keep realistic goals and expectations. The directors and the CFOs did not consider other factors in this question such as understatement of expenses, capital needs or discount rates, as significant.
When asked about the effectiveness of both the boards and the finance teams in an M&A transaction, CFOs and directors were moderately aligned, with vast majority of both groups rating their counterpart’s M&A effectiveness as “somewhat effective” or “very effective.”
Even though this survey points out some areas in which the CFOs and the directors are closely aligned regarding their M&A efforts, they survey highlights a number of differences in risk perspectives associated with M&A activities that exist between CFOs and boards. Perhaps greater dialogue among CFOs and directors will help strengthen the organization’s focus and attention on risks associated with the execution of M&A activities.