Buying and selling companies is fun. Dealmakers get to think about heady concepts like strategy and “first-mover advantage.”
There are late-night meetings, intense negotiations and when you finally sign on the dotted line, there are champagne toasts and lots of backslapping.And those lucite deal trophies. Those are nice.But then comes the massive task of integrating two companies, two cultures, two networks and two accounting systems. And right in the middle of the fray is the financial executive, batting cleanup in the final inning of the dealmaking game.
“When we acquired Nokia they had four factories, 85 subsidiaries, 32,000 employees and, of course, they were headquartered in Finland,” explains Taylor Hawes, general manager of corporate finance and services for Microsoft Corporation. “We had to integrate the supply chain between the two companies so we could continue to move inventory and manufacture, while at the same time being able to budget, forecast and plan using a common standard set of records.”The task can seem monumental, but chief financial officers, treasurers, chief accounting officers and other financial executives around the globe will be dealing with the hangover from an merger and acquisition binge that shows little signs of slowing.And the key for successful post-merger integration, industry professionals argue, is a combination of flawless execution coupled with an laser-like focus maintaining the value of the deal that has already been put together by the CEO — and that anxious stakeholders are watching like a hawk.
The Current Boom
The $7 billion deal between Microsoft and Nokia was just one of the mega-deals that have been fueling what market watchers call the current “M&A Boom.”
Corporate mergers have been hitting record levels for the past 18 months, with at least $3.4 trillion in mergers in 2014, according to tracking firm Dealogic. That is the most since the height of the last deal bonanza in 2007, when there was a record $4.3 trillion of transactions. In the U.S., deal activity surged 54 percent to $1.5 trillion in 2014.
2014 was flush with other blockbuster deals, including Actavis PLC’s $66 billion agreement to buy Botox maker Allergan Inc., the largest of the year; AT&T Inc.’s $49 billion proposed takeover of DirecTV; and Comcast Corp.’s unsuccessful $45 billion deal to acquire Time Warner Cable Inc. And the global corporate merger supertrain show no signs of applying the brakes. There was $902.2 billion in announced mergers and acquisitions in the first three months of 2015, which is the highest first quarter total since the pre-financial crisis 2007 rush of $1.08 trillion, according to tracking firm Dealogic.
Megadeals are the norm so far this year, with 14 deals valued at $10 billion or more announced for a cumulative total of $267.4 billion, the most in a first quarter since 2006.
The reason is simple: cheap money, fat corporate wallets and easy targets.
A potent combination of a record bull market, historic low interest rates and overflowing corporate cash accounts have emboldened U.S. dealmakers despite increasingly dismal growth possibilities in Europe, according to KPMG’s 2015 M&A Outlook survey.
“With growing consumer confidence, favorable credit markets, and limited prospects for organic growth, U.S. companies and sponsors are very comfortable using their balance sheet cash and private equity dry powder to achieve growth through acquisitions,” Dan Tiemann, KPMG’s national leader, transactions & restructuring, said in the survey.
However, it’s not all just deal making and good times. The KPMG survey also points out that “as deal size increases, the risks associated with deal success become more significant.”
According to the survey, executives are especially worried about the post-deal integration phase of a merger, when a flub in executions or tactics could suck the expected value out of any acquisition.
The most important part for success in a merger is a “well-executed integration plan,”according to 43 percent of the respondents of the KPMG survey. In fact, integration is top of mind for industry leaders when moving ahead on a deal.
The most challenging integration issues included cultural and human resources concerns (53 percent), products and services integration and rationalization (32 percent), accounting and finance transformation (25 percent), and customer and supplier integration and rationalization (23 percent).
That is far below other risk factors, including valuing the deal correctly (26 percent) and having an effective due diligence plan (18 percent).
Getting an Integration Plan in Place
Microsoft’s Hawes, who is currently the immediate past chair of Financial Executives International, was in a unique position to understand the M&A integration challenge.
Hawes leads a group within Microsoft called Finance Systems & Operations, which has responsibility for global procurement, programs and compliance, finance business intelligence (BI) reporting and finance operations. On a global basis at any given time, Hawes is closing the books in 110 countries and managing about 500 people and between 1200 to 1300 vendors.
“Most large corporations have a corporate accounting function that closes the corporate books and file the 10Qs and 10Ks while also dealing with the broad corporate accounting matters,” Hawes explains. “Then there’s financial planning and analysis, which includes budgeting, planning and forecasting. The third major function would be the finance of things and processes, including operations. That’s our responsibility.”
Hawes adds there were three large-scale components to integrating Nokia, with the first being the integration of the employees and aligning benefits, job titles and levels, which falls within the realm of human resources. The second large group of work is connecting the technology, such as network infrastructure and common systems.
“The third piece was integrating all the financial applications, the financial data and harmonizing the accounting consolidation of the books,” he says. “If you think of those three buckets of work, the finance bucket is always a very complex one.”
The first thing any financial executive should do when preparing for an integration is putting the best team in place and structuring the work so it can be coordinated across multiple regions and disciplines, Hawes explains.
“In order to get the projects moving, we created what we called ‘end-to-end process’, where we defined five towers of business and brought everyone together in a room and did walkthroughs. As we moved along, we asked, ‘Okay, what haven’t we anticipated? What haven’t we thought of?”
During the Microsoft/Nokia integration, there were periods where Hawes oversaw multiple integration teams totalling up to 250 people, often “following the sun” as one team in China would hand off work to Helsinki, and then Helsinki would hand off a project to the Seattle headquarters.
“My role — aside from being responsible for delivering on a timeline — is to always be oriented around risk mitigation and how do you ensure that there isn’t an unanticipated outcome or risk that we accomplish,” he says.
“We actually were able to complete the integration in the end in nine months, and I can say that it is probably one of the best we’ve ever done,” Hawes says with pride.
Getting merged correctly and on a specific timeline is more important than many people realize because the value of any deal can be drained in the integration phase, according to a recent report by Deloitte.
Over half of the executives surveyed by Deloitte estimated the total benefit from the “synergies” of merger were less than half the total deal value. In addition, almost nine in 10 executives surveyed said the integration life-cycle extended no longer than two years.
What are the keys to integration success? The Deloitte survey says that 82 percent of respondents cited creating a “dedicated integration team” as a critical early step.
Financial executives should be part of any sort of deal or acquisition, and should play a central role at every step along the way, Hawes argues.“When you think about it in the terms and conditions of the deal, the break clauses, how the deal comes together — whether it’s an asset purchase or a stock purchase — the whole construct of the deal relies on having a financial executive at the table,” he says.“Operationally, how are you going execute everything from sales orders to accounts payable to credit and collection to a different incentives of our customers. All of that has financial implications and also U.S. GAAP compliance implications, so it’s critically important that finance is involved in every step of the way.”The importance of having a financial executive monitoring and making sure the organization’s post-integration needs are met is exemplified that when integration plans slide off-course or a key hurdle is missed, things can (and do) go horribly wrong.While corporate M&A is hitting new highs, failed deals are also notching some historic numbers. According to Dealogic, global “withdrawn” merger and acquisition volume totaled $193.3 billion so far this year, which is the highest year-to-date level since the beginning of the financial crisis in 2008, when $241.7 billion in deals went belly-up. The 2015 growth in uncompleted deals (and canceled celebration dinners) is also 15 percent higher year-on-year.The volume of busted deals this year was fueled by Comcast’s withdrawn $69.8 billion bid for Time Warner Cable Inc. this spring, which Dealogic says is the fourth largest “targeted withdrawn deal” on record in the U.S. and in the top 10 globally.Protecting existing value, as well as discovering new value, is also a key objective after the deal ink is dry, Microsoft’s Hawes says.
“We have to ensure that we capture the value that we acquired; that’s probably the most important element of the role that we play,” he says.
Financial executives need to make sure the deal is structured in such a way that it achieves the business objectives of a company and creates value. Then financial executives need to bring these two companies together without disrupting the business and destroying value.
“There’s no upside to doing a poor integration,” Hawes says. “If you do a great job, you did what you were supposed to do. If you do a terrible job, you could potentially destroy the value of what you acquired.”