CFO warns not to let ego ‘infect’ acquisition decisions
A CFO shares how to approach an acquisition, from building a business case to conducting due diligence and promoting harmonisation post-acquisition.
Part of the CFO’s role in acquisitions is keeping emotions separate from the due diligence process, said Allied Pinnacle CFO Dean Sappey.
Sometimes, business leaders might be tempted to let an “element of corporate ego” infect an acquisition by thinking, for instance, “Hey, this acquisition means we might become the biggest player in this category.”
These considerations can cause businesses to overlook parts of the due diligence process by thinking more about the appearance of an acquisition than its actual business case.
Before acquiring a target organisation, it is up to the CFO to “wear the risk management hat.”
This involves making inquiries about the continuity of the business post-acquisition, ensuring a target company has good coverage for risk on property and in the business, and ensuring the appropriate controls and systems are in place to guarantee internal control and continuity, said Sappey.
Once the acquisition has been carried out, knowing how to harmonise the target company with the acquiring business is crucial and it involves two main components.
First, there is the challenge of having different enterprise resource planning processes (ERPs). Building cross-functionality both within an organisation and along the supply chain is a “huge undertaking,” said Sappey.
It involves “continuing to keep building functionality, building integrations with companies that you might ship product to, like third-party logistics providers.”
“And you can imagine, it’s not like just getting a new laptop and transferring all your stuff over … it’s like layers of ways of doing things, and trying to migrate that from one system to the next,” he said, adding the process is an ongoing one.
Building consistent processes from a control perspective is “really quite effective for a CFO,” he said.
Getting personnel on board with these changes is a challenge of its own. It involves “taking operational people around the business and throwing a completely different way of working at them.”
While some organisations might have chief information officers to aid in the process, often change management in harmonising financial operation systems is the province of CFOs, he said.
The process involves an element of compromise, in making the necessary changes to ensure a streamlined operational process while not overly burdening staff with excessive, rapid changes. It is a “real trade-off,” said Sappey.
“One of the tricky things for people is that often [the change] will shift the ownership and accountability for things when you harmonise systems.”
“So, that’s one thing we’re conscious of in [getting] the support of HR,” he added.
Sappey agreed the role of the CFO requires increasing levels of alignment with the HR function.
The CFO should be engaged in HR activities, rather than seeing it as an outsourced activity, “even taking a very active role in selection and recruitment, through to remuneration and reward.”
The second part of the harmonisation process relates to identifying and redeploying resources towards profit drivers post-acquisition.
Among leadership, it is the CFO who plays the biggest role in understanding the profit drivers in an organisation and being able to identify how they might have changed following an acquisition is crucial.
While much of this analysis will have taken place before the acquisition is performed, Sappey explained that the reality can look quite different down the track.
For instance, certain financial realities might have been missed in the due diligence process, meaning profitability will need to be reassessed. This falls squarely within the CFO’s remit, he said.
“Some organisations might be more limited in terms of understanding the profitability of a product, or what we might call a stock keeping unit.”
That analysis “might present some surprises after [an acquisition]” which will often require a realignment in terms of resource deployment, said Sappey.
“A CFO will navigate through understanding whether the business is meeting the reality of the business case … it is a combination of profitability and [asking] ‘are we meeting longer-term strategy,’ and ‘are we still yet to execute some things we said we would when we bought the business?’”
