2015 marked a new record for the number of mergers and acquisitions reported. According to Dealogic more than 38,000 were launched during the year. However, many of these, in reality, did not succeed. Certain large transnational mergers were undermined by the activism of the Obama Administration. Pfizer, which was due to merge with Allergan for $160 billion, has indefinitely postponed this operation, for example.
This is an extreme case. In general, a merger is a good means to allocate capital to external growth, while at the same time, sustaining a good level of return on investments. That's the theory. In practice, time is a key factor.
Practitioners of mergers generally agree that the first one hundred days are crucial to success. Some see the starting point at the "closing"; others put it six weeks before the "closing", when negotiations are not only well under way, but on the verge of success. This second hypothesis is perhaps more relevant because it takes into account the technical steps required before the closing.
To succeed, the CFO’s team has to go through several steps and explain the proposed transactions to multiple entities, some internal, some external, the stock market authorities if the merger involves listed companies, different trade commissions; and employee representatives who will oversee the convergence of two workforces. The CFO drives these discussions throughout the process. In addition to legal obligations, the CFO must also ensure effective communication with, and the buy-in of, a huge range of stakeholders – from investors, to customers and even suppliers. To successfully present, entice and persuade stakeholders, the CFO will rely on multiple tools, including financial simulations and what if scenarios.
As such, the foundations of the proposed merger must be solid. The boards of the two companies must evaluate multiple scenarios, income statements and balance sheet forecasts before making their decision public. To achieve this, two solutions are possible. The first possibility involves the intensive use of multiple spreadsheets. The second, a much more efficient alternative, is to collaborate on data, such as profit and loss, balance sheets, and workforce data, in the cloud.
The spreadsheet option is error-prone, with both companies working on several different data sources. The collaborative cloud option, however, provides a unified and integrated view of income statements, balance sheets, investment projects and members of the workforce. A single global vision allows the CFO to develop a meaningful action plan and adjust it over time to meet the market reality. In essence, you cannot present vague economies of scale to get your investors, customers and employees during a merger, you have to show a documented and robust commitment to growth and reinforce this with accurate real-time data.
Behind any merger, there is a vision. Successful mergers rely on flawless execution by the CFO and the finance team, along with the broader C suite. Much as the skipper of a racing yacht steers the course, but relies heavily on the crew, the CFO needs to align the crew and also communicate the course to the entire company.
The best way to achieve this is to quickly establish a culture of cash generation and cash conservation. Communicating the company’s bottom-line position to leadership on a weekly basis promotes transparency and enables management to rapidly educate teams, down to an employee level. Suddenly, operating expenses and capital expenses become much easier to justify. Even for a large company of more than of 20,000 people.
A merger is not simply about cash optimisation after closing. This idea must be deeply rooted from the start in the minds of the finance department. Although hypothetically a merger of equals can exist, companies are normally in the position of either a buyer or a seller.
The buyer has several potential sources of funding: cash, shares, bonds, another form of debt, or a mixture of the three assets (cash, share, debt). The sale of some assets, which will become non-strategic after the merger, may enable the buyer to apply for a line of credit.
The CFO of a listed company may choose to use shares for the merger. If the valuation of the company is high, it seems a natural way to pay the seller. However, as Warren Buffet wrote in a 2009 letter to shareholders of Berkshire Hathaway, using shares to finance a merger "is the surest way to impoverish its shareholders". Purchasing with shares dilutes the existing shareholder ownership. Cash and credit, if the cost of credit is "reasonable", are the best ways to create value for the buyer’s shareholders. The use of spreadsheets is not a viable option for simulating various financing assumptions. Instead, a robust collaborative solution is a must.
The value of the “cash culture” proposed by the CFO will then become apparent, backed up by accurate figures. Assuming the buyer has used some form of debt to pay for the merger, this will align the interest of the bankers with that of the shareholders. Banks are then in a position to consider other creative forms of financing such as customer receivables securitisation or the creation of real estate special purpose entities, to raise finances.
These solutions may be presented after the critical first 100 days, but the CFO first needs to lay the groundwork and secure the vision in this short period, to deliver a successful merger in the long run. Having the tools in place to support them along this journey is an essential part of the process.