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.
Ask, “What are we buying?” In due diligence, the acquirer should always ask, ‘Why are they selling?’ Understanding the motivation of the selling shareholders, board and management team can give the buyer unique insight into what the risk factors will be, Chadwick said. Taking a risk-based approach to diligence enables the acquirer to get to the top issues quicker. Understanding the psychology of selling management is key, he emphasized, in particular understanding the troubles they might have been through the last three to four months. “What was the last quarterly earnings report? What are they saying in the blogosphere about the product? Maybe [the seller] had a bad product release that hasn’t shown up in the numbers yet.”
Although there are plenty of due-diligence checklists that run thousands of pages, there are really only about five to eight items that point to the key risks in any particular deal, Chadwick said. Those things are going to make the deal successful or not; everything else is noise. CFOs should assign their best people to the diligence process, but the best of the best to those deal makers or breakers, he said.
When Microsoft bought Skype in 2011, one thing that floored Chadwick was how risk-based Microsoft was with its diligence exercise. “There was a lot of data-room activity going on in the background, but what they did was identify four issues across the business they wanted to dive into and they were relentless on those four topics,” Chadwick said. “And they were right – those four issues were the ones that would have killed the deal or made it successful.”
Ask, “What’s the plan?” What’s the plan leading up to the announcement, between announce and close, and what’s the plan for integration? What role will each person play pre-announcement? A successful launch means making sure the acquirer’s shareholders understand why the acquisition is a strategic fit, Chadwick said.
Between announcement and close, who will maintain the connection with the selling company? There are certain things a CFO can and can’t do during that period, Chadwick pointed out. The CFO has to stay connected with the target company management and keep on top of the integration plan as it continues to develop. “What often happens is that we all get very excited and energized leading up to the day of announcement, and then the business-development guys take a step left, and the integration team hopefully steps up. But most of the deals that fail do so because the integration plan wasn’t in place or wasn’t understood,” Chadwick said.
The key to integration is to ensure budgets are aligned, said Chadwick. “It sounds very tactical, but I have seen a number of deals where there wasn’t a handshake or a firm sign-off from the go-to-market or sales teams that ‘Yes, we are going to put an extra 50 people on this deal to make it successful.’ ” If that doesn’t happen, Chadwick said, for the sake of $5 million of operating spend the company may be putting at risk $400 million of capital expenditures associated with the acquisition. “As the CFO, you need to make sure there is a tight alignment of management teams and that budget is allocated,” Chadwick said. “Get people assigned to the value drivers, those integration points. So if there are five to 10 things driving synergy, I want a name against each one and I want to meet with them regularly.”
Lock in leadership. Get to know the leaders of the target business. For the company’s management, a takeover is a very different experience. Those people were running an independent operation 24 hours ago, Chadwick pointed out. Why are they going to work for the buyer? In some cases there is a lot of money being made. “If the CEO has just earned $100 million, and the acquirer has $5 million locking him or her in, that $5 million is not going to be the reason that person stays or goes.” The CFO has to understanding the selling team’s motivations, and spending time with them is key. “I spent much one-on-one time with the CFO of Microsoft going through integration,” Chadwick said. “The empowerent I felt as a result of that access made a huge difference as I drove the integration of Skype into Microsoft.”
Trust your gut. At times during deals there have been things Chadwick felt were not going right. About one deal he said to himself. “It’s not a big deal, just a few hundred million dollars, and I just don’t buy into it.’ That’s when I should have stepped up and played a greater role. I should have said, ‘I really don’t get it.’ I should have been a stronger advocate for doing the right thing and trusting my gut,” Chadwick said.
Of course, M&A is not the answer to every problem or strategy, he noted. “What I really want to be doing is developing the technology ourselves, potentially licensing it from someone else or partnering with a company,” he said. “We exhaust all alternatives before we think about an acquisition, because if I can leverage fewer dollars, or leverage more options through a set of partnerships, I probably have more reach.”
In contrast, Chadwick calls an acquisition “a declarative move” into a certain market or markets and with a certain partner. “I like to manage my life with optionality – making sure I have as many chocies as possible.”