The Role of the CFO in M&A Decision Making

by John Orlando

According to a Harvard Business Review study, when it comes to corporate mergers & acquisitions (M&A), “too many executives bring insufficient discipline to the evaluation process that fuels these deals — as a result, they often get deals wrong.”


Last year was a respectable year for M&A activity. According to a PwC report, deal volume increased (though not value). In the fourth quarter alone, some 68 deals were announced, with a $48.31 billion value. 

And Deloitte reports that 2018 will see an acceleration in M&A activity, both in the number and size of transaction. Technology acquisition and positive macroeconomics will drive this year’s merger mania.

M&As can be a good way to scale a company or diversify its product lines, but it’s hardly fool proof. Over the past 100 years, the overall record is, as the Economist put it, “decidedly unimpressive.” Why? To begin they rarely deliver on promise of improved efficiencies in R&D and investments, which means the hoped for higher profits are largely elusive. In fact, about 70 percent of all M&As fail, meaning that the buyer incurred a massive write-down after the merger, divested the acquisition later on, or even went bankrupt. For sellers, a company sale often leads to a mass exodus of top talent. A Harvard Business Review study showed that 60 percent of them destroy shareholder value. 

Sometimes those failures are spectacular, such as when America Online acquired Time Warner in a megamerger for $165 billion in 2001, then reported an astonishing loss of $99 billion the following year.

If the siren call of M&A seizes your CEO or board this year, they’ll no doubt ask the CFO for input. If that’s you, take advantage of that opportunity to protect your company from potential disaster by asking specific and pointed questions. The same Harvard Business Review study on M&As found that “too many executives bring insufficient discipline to the evaluation process that fuels these deals — as a result, they often get deals wrong.”

#1: Is this the right strategy?

A merger or acquisition is sometimes seen as the fastest and most efficient way to achieve a range of goals, such as acquiring a desired customer segment or dominating a market sector. But acquiring or merging with another company may not fit with your long term business strategy. You need to determine if and how a proposed deal will materially help you achieve your long range plans.

For instance, if your long term strategy is to acquire the talent necessary to transform or automate your product line, acquiring a company with a strong engineering team may be a good strategy. The same would apply when a company offers a similar service in a market you wish to enter.

But be wary of companies that offer a technology or product that’s cool or cutting edge, but requires a tremendous amount of rejiggering to fit with your long term strategy. This is precisely what happened in 2007 when Liveperson, the industry’s leading provider of online chat services at the time, acquired Kasamba for $40 million, a service that allows consumers to pay to chat with experts. Kasmaba’s most lucrative category of experts was psychics, hardly a fit with Liveperson’s impressive roster of enterprise-class customers. In fact, competitive chat services used the psychic network against Liveperson. Liveperson has since divested Kasamba.

#2: Are there synergies to be gleaned?

If you Google “why M&As fail” you’ll see an abundance of articles that cite a mismatch of synergies as the top reason why deals don’t turn out as expected. It’s tempting to assume that the performance of two companies combined will be greater than the sum of the separate individual parts, but don’t count on it. 70 percent of M&A firms overestimate the synergies and savings of the deals they enter.

Synergy stems from two sources: economies of scale, and reduction of workforce. The bigger the company, the bigger the economic advantage, in terms of volume discounts and so on. And when two companies with a similar business merge, there’s no need to retain two HR departments, CTOs, etc.

How do you know if synergies exist in a deal your company is considering? Success lies in both companies being able to pinpoint exactly where they’ll find synergies, how they’ll exploit them, and set specific and multiple benchmarks for assessing success.

#3: How will the companies be integrated?

This is the most important -- and complex -- aspect to consider in M&As, but one that is often overlooked. But if corporate culture doesn’t mesh, it will take a lot longer to complete the integration, and it probably won’t ultimately be successful. According to the Society Human Resource Management, over 30 percent of mergers fail because of culture incompatibility.

Richard D. Parsons, President of Time Warner, cited this issue as core contributor to the failure of the AOL/Time Warner merger: “I remember saying at a vital board meeting where we approved this, that life was going to be different going forward because they’re very different cultures, but I have to tell you, I underestimated how different… It was beyond certainly my abilities to figure out how to blend the old media and the new media culture.”

At the end of the day, companies are run by people, who have their own preferences, beliefs, habits and quirks. Corporations, like people, resist changing the way they do things. That makes it hard for managers to predict whether companies of different cultures can find a way to work together.

John Orlando is Executive Vice President and Chief Financial Officer at Centage.