In 2013, the volume of global mergers and acquisitions (M&A) reached USD 2.91 trillion, according to Dealogic, a platform used by investment banks. Sizeable deals in the healthcare and telecommunication sectors, among others, led to the US alone accounting for USD 1.18 trillion.
For analysts who still considered 2013 to be a disappointing year for M&A, 2014 has got off to a flying start. Comcast bought Time Warner Cable for USD 45 billion in the first half of February. A few days later, Facebook’s acquisition of Whatsapp for USD 19 billion in February hit the headlines and social media timelines all around the world.
Industry experts are optimistic about the M&A outlook for 2014. Forbes attributes this optimism to six reasons:
- Positive signs from credit markets and lenders, which could influence leverage levels
- Low interest rates
- Improvement in the level of corporate cash and private equity capital reserves
- Substantial inventory owned by private equity firms that could be liquidated
- Relatively steady performance of the stock market
- Increasing cross-border M&A activity
In 2013, a Deloitte survey of directors and Chief Financial Officers (CFOs) from 200 companies with revenue of USD 500 million and more, found that failure to effectively integrate was their biggest concern post an M&A deal. The report also emphasized that since M&A transactions employ considerable funds and have associated risks, directors and CFOs need to work together closely to get maximized value from the deal.
Finance and Accounting integration is one of the key steps for a successful M&A, that can not only synergize the energies of two different companies, but also communicate the soundness of the strategy to important stakeholders.
Strategy for Finance and Accounting Integration in an M&A scenario
An M&A announcement usually puts companies in the limelight, and the onus of ensuring it goes smoothly can weigh heavily on the shoulders of CFOs and finance executives. Several organizations appoint dedicated M&A finance teams, who can contribute to the process by screening acquisitions, conducting due diligence, crystallizing the terms of the deal, as well as smoothening the integration process.
A step-by-step strategy to Finance and Accounting integration of the two companies, developed well in advance, can pave the way for a seamless transition on Day One (the first day when two businesses are legally merged) and beyond:
1. Laying down reporting lines for Day One and beyond: The hierarchy and functioning of the finance department after the M&A, needs to be decided beforehand. If finance executives from the seller company are being absorbed into the buyer company, training and orientation programs need to be conceptualized.
2. Analysis of seller company financial practices: Different companies have different Finance & Accounting policies and processes. These could be for aspects such as calculation of revenue, valuation of inventory, and closing cycles, or for more complex issues. By understanding these differences, a strategy to integrate the diverse processes can be conceptualized and implemented, starting from Day One itself.
3. Making a plan for consolidation: The areas of focus for Finance and Accounting integration between the two corporate entities include treasury and cash flow, controls and compliance, financial account statements, financial planning and analysis, procurement, invoicing, assets and liabilities, accounts payable, accounts receivable, and tax. Evaluating the magnitude of integration can help CFOs to make a plan for the preparation of consolidated books on Day One, as well as apprise them of potential challenges for the first close after the M&A.
In 2011, Accenture surveyed 151 finance and strategy executives from 12 countries, representing 21 industries. One of the questions the company asked was about the impact of an M&A deal on the Finance and Accounting department. The results are depicted below:
4. Data migration:Requiring close collaboration between the Finance and Accounting and IT departments, the financial data gathered from the seller company needs to be organized in one secure place in electronic format. Then, consolidation of this data has to be done with meticulous care, as two fields may not carry the same meaning across both the companies. All of this needs to be in compliance with regulatory norms and Generally Accepted Accounting Principles (GAAP). In such a scenario, it may be wise to identify key people from the seller company who have in-depth knowledge of its Finance and Accounting practices, and retain them. Additionally, consolidation tools will also have to be selected and deployed. The existing ERP system could have to be revised or a new ERP or specialized tool will have to be developed.
5. Developing new KPIs: The old Key Performance Indicators (KPIs) of the buyer company, which could have been Earnings Per Share, Return on Capital Employed or Operating Margins, among others, will need to be revised in the light of the business objectives, larger size and market share of the new business entity.
6. Setting milestones: Milestones have to be set for the transition of the Finance and Accounting framework of the new business entity. These would require collaboration between different departments. A period of 100 days (around three months) to 180 days (around six months) is considered ideal for the complete transition to Finance and Accounting integration of the two companies. New systems and policies should be in place before the next annual budgeting and planning cycle.
7.Identifying new opportunities: The implementation of the Finance & Accounting strategy can reveal new avenues of efficiency for the organization after the M&A. Opportunities could include consolidating vendors to benefit from economies of scale, among others.
8. Consider outsourcing: The Finance & Accounting departments of the buyer and seller companies have a long list of tasks to accomplish before the deal is signed and once the M&A comes into effect. Some of these can be outsourced to specialist companies with experience in Finance & Accounting services and data management solutions, to allow the CFO and the team to focus on critical core-business related aspects of the transition:
- Synergizing accounting processes and data: Specialist outsourcing companies can assist in streamlining the Finance and Accounting data of the seller company to the policies and practices of the buyer company or the new merged company.
- Capturing data: In case the seller company did not have business process automation processes in place, Finance and Accounting information could be in the form of physical documentation. Converting this data to a digitized format is a time-consuming job, that is best handed over to an outsourcing company with the required expertise.
- Consolidating data: By outsourcing, all the data of both companies can be consolidated at a fast pace, which could off-load some of the pressure of the first close.
- Gathering data across global locations: If the seller company has operations across different locations, the quantum of Finance and Accounting data to be gathered will be considerable. Specialist outsourcing companies could have the personnel and capability to accumulate this information easily.
In its 2013 year-end outlook, PwC predicted that the momentum of M&A activity seen in the later half of last year, would continue into 2014. With a robust plan for Finance & Accounting integration in place, companies could be poised to make successes of their M&A deals, the fruits of which can be enjoyed over the long term.