Are You a Target?

With M&As in full swing, many CFOs will find themselves in a purchased company. Here's how to manage the transition.

Meet Patrick Albert, a broad-shouldered man who went to college in Schenectady, New York, loves Tokyo, and calls himself CFO and general manager, Pacific finance, of Momentive Performance Materials. His title is new, by the way. Albert was CFO of Tokyo-based GE Toshiba Silicones until this December. But when Apollo Management, the US private equity buyer, bought the company for US$3.8 bn and changed its name, it asked Albert to stay on. It’s life in a very different world.

“Working for GE was like working for a giant mutual fund, and you could leverage off its resources,” he says. “But we’re not in a portfolio anymore.” There’s no cushion, no multinational resources — whether legal, risk management, or HR — to draw upon. Any problem must be fixed with capital coming directly from the owners. “Suddenly our jobs got a lot more important,” says Albert. Apollo financed its purchase with US$3 bn in debt. In this environment, “getting the foundations right” is not a luxury. A strong system of cost control and financial reporting ensures survival, says Albert, or “we simply won’t be able to do what we’re meant to do, which is grow EBITDA.”

Welcome to the M&A boom. There’s a certain euphoria associated with the trend. But CFOs in targeted companies can be forgiven for having mixed feelings. In the hunted company, enormous change is immediate and the threat of job extinction looms.

But like Albert, CFOs can — and do — adapt quickly. They’ll have to, as M&A activity will likely continue at a fast pace throughout the year. (See our list, “Targets Confidential,” below.) Private equity money is the catalyst. Merrill Lynch analyst Stephen Corry, based in Hong Kong, notes that the major global private equity firms are cashed up to the tune of US$25 bn, and will probably spend that amount globally in the next year-and-a-half.

Some of that — a source at a major fund puts the figure at US$15 bn — will be devoted to Asian businesses. Private equity investors expect greater returns from Asia than elsewhere. The region, after all, has the lion’s share of the world’s growth economies and some of the better demographics for consumer market growth. Valuations in Asia, too, are still comparatively low. Current deals average between 7.5 and 8 times economic value divided by earnings before interest, tax, depreciation, and amortization (ev/ebitda), as opposed to the US and Europe, where valuations of up to 12 times ev/ebitda are common.

One route of buyout firms such as Carlyle, TPG-Newbridge, and Kohlberg Kravis & Roberts — all big players in the region — is to install a new CFO after the deal as a change agent in the purchased company. But replacements are not the rule. “I would say that being CFO is a vulnerable position,” says Alain LeCouedic, partner with the Boston Consulting Group in Hong Kong. But, he adds, “CFOs who are seen as value drivers and who grasp the strategy of the new owner are just as likely to be seen as an ally.”


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