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Six Tips for Avoiding M&A Failure

Finance chiefs must ask tough questions, understand the seller's motivation, and trust their guts, says a veteran deal-making CFO.

PHOENIX — In a business climate where the pressure to earn returns on a company’s cash hoard is acute, a merger or acquisition idea can easily take on a life of its own and get pushed through the finance department without sufficient diligence. Even if there is diligence, the right questions may not be asked. Or there could be little focus on what risks the deal poses to the acquiring company.

Who’s responsible for the many ways deals fail (and about 70% of them do)? The CFO, along with the CEO, is in the hot seat with investors when the issue is M&A strategy and execution. So said Jonathan Chadwick, finance chief at software company VMware, at the CFO Rising conference here on Monday.

Chadwick, who’s been heavily involved in deals at Skype, McAfee, Cisco Systems and VMware, said as a CFO he feels a “huge responsibility to invest the time to understand a transaction and help shape M&A strategy.” Failed deals don’t all crash and burn, but “they don’t quite achieve all their objectives that were laid out, and a lot of the objectives have a pretty significant financial component to them,” Chadwick explained.

To help CFOs “step up” and avoid the most common mistakes in M&A, Chadwick provided the following six tips:

Hope is not a strategy. Going slow in order to go fast will pay dividends, said Chadwick. You’ll get a better result by forcing management to slow down a little bit. The business-unit leader or the CEO can get very enamored of a particular acquisition or a personality or a technology, he points out. It’s the CFO’s job to ask the tough questions: “What is our strategy?” (the strategy of the company, not just the strategy behind doing the deal in question). “If you can’t answer the question of ‘what is our strategy as a business,’ how can you decide to spend a billion or two on your next acquisition?” Chadwick asked. Do the deal’s objectives make sense? Is it aligned to company’s vision. Why will customers and shareholders be excited? “I don’t sit in my office and think, ‘I hope this is going to work out, let’s just roll the dice,’ ” Chadwick said.

Ensure cultural alignment. “This is one of those areas that is amorphous, but the CFO is uniquely able to test [it dispassionately],” Chadwick said, because the finance chief is generally not the one sponsoring the deal. “The number-one reason I think deals fail is because there was not an agreement or a matching of cultures. The worst deals I’ve done is where we’ve had separate leadership and people were talking over each other.” A CFO may know in his or her heart that it doesn’t feel quite right when walking the corridors at the target company, he said. Thus the CFO needs to have a voice about what the target’s culture feels like. “In the best deals I have done, the managements are finishing each other’s sentences and the teams mesh deeper down,” Chadwick said.

3 thoughts on “Six Tips for Avoiding M&A Failure

  1. ” Ensure cultural alignment. “This is one of those areas that is amorphous… ”

    In 2008, Harvard Business School Professor Robert S. Kaplan and his Palladium Group colleague David P. Norton wrote The Execution Premium: Linking Strategy to Operations for Competitive Advantage. They outline six stages in their management system:
    1. Develop the strategy
    2. Plan the strategy
    3. Align the organization
    4. Plan operations
    5. Monitor and learn
    6. Test and adapt

    Within every organization, decision making drives performance. Every employee comes to work every day and makes decisions that impact performance.

    The workplace has many temptations that employees must resist, from the petty impulse to claim credit for someone else’s work, to the unscrupulous lapse of lying in a negotiation context, to the criminal act of misrepresenting financial numbers.

    These decisions, at every level of the organization, define the corporate culture.

    As Kaplan and Norton suggest, the leadership team must make use of every means available to them to influence and align every employee’s decisions with the goals and strategy of the organization to drive performance. Whether it’s JP Morgan, BP or federal programs such as the U.S. Department of Defense, Department of Energy, etc.

    What are the key steps to execute a post M&A strategy?

    If Kaplan and Norton are correct – visualize, communicate, align (coordinate), provide incentives, make decisions, measure, report, reward and celebrate.

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