Date: 9/16/2013

Deloitte Financial Advisory Services LLP

Why CFOs, Boards Differ on M&A Goals




A smooth and effective merger and acquisition, one that requires generating significant value by taking strategic risks, depends on a number of revolving parts, including strong collaboration and communication between the board and chief financial officer.

But according to a recent Deloitte study, both parties often have considerably differing points of view on integral aspects of company M&A policy and risk management. This, the study says, includes deal strategy, targets, financing, integration priorities, and the effectiveness of in-house M&A teams.

The analysis, titled Bridging the Gap: M&A, surveyed corporate directors and CFOs responses serving at public companies with annual revenue of $500 million or more. Chris Ruggeri, a principal in the Advisory Services practice of Deloitte Financial Advisory Services LLP, the survey effectively compares and contrasts, plus analyses, the nearly 200 responses on their views of M&A and risk.

“Today there is so many companies – it’s been very well documented – with very healthy balance sheets. They have tremendous cash balances and that suggests that they have the fire power to do deals. Against that backdrop and the need to grow, the level of deal activity has been fairly anemic,” Ruggeri tells Leo Rommel of Industry Today. “We wanted to understand this apparent disconnect and what was happening in the marketplace.”

She adds, “We are very interested in helping our clients understand what it is that makes effective deal makers and why certain companies consistently create value through M&A for their shareholders. We wanted to look deeper into what they do to drive value.”

The result, she said, were mixed, adding that their viewpoints likely reflects their different responsibilities in an M&A deal and in the day to day operations of a company.

Among differing opinions between board members and CFOs, according to the study, was that directors’ primary M&A objective – cited by 56 percent of respondents – was to pursue cost or scale efficiencies, an objective shared by only 32 percent of CFOs.

“CFOs realize that and they're the guys in the trenches who play a key role in making sure that those cost savings are realized, and that they may not be as easy to attain as you would think at the outset without a solid plan, solid identification of those synergies, and a solid execution strategy to harvest them.”

Likewise, CFOs list product or service differentiation as their primary M&A objective. About 64 percent of CFO respondents stated this, the survey says, compared to just 45 percent of board directors.

Meanwhile, directors are more concerned about synergy capture from acquisitions – cited by 25 percent of directors as the primary integration risk – than CFOs are. A mere 11 percent of CFOs reported such a concern. In contrast, CFOs view customer retention as a greater risk than directors do, 32 percent to 20 percent.

Also, directors view the risk-related M&A ability of CFOs and their finance team as higher than CFOs themselves. In contrast, CFOs view of the board’s effectiveness in M&A risk oversight lower than the opinion of the directors themselves.

Perhaps surprising was that while nearly half of board director respondents said finance departments were “extremely effective” in properly assessing M&A risks and correctly evaluating the upside of a transaction, merely 19 percent of CFOs said the same about themselves. CFOs were equally harsh in their views of board members. Just 13 percent of CFO respondents, according to the report, rated board members as “extremely effective. A somewhat better percentage of board members – 27 percent – said the same.

The report did find some areas of consensus, however few there were. One, for instance, was how boards and CFOs agree that their M&A strategy for the rest of the year and next will be to seek smaller, more strategic deals “to take advantage of favorable opportunities and valuations.”

But CFOs view debt as a far more attractive funding source for these acquisitions than board directors do, the study adds, citing a 37 percent to 25 percent differential. Still, and in another example how there was consensus, both groups reportedly view available cash as their most likely resource.

And, in one additional meeting of the minds, both sides – 47 percent of directors and 51 percent of CFOs – agree that the cause of greatest concern in achieving M&A success is integration failure.

“CFOs are playing a more strategic role in the organizations that they serve,” Ruggeri says. “As a consequence of that, CFOs know that the sustained value and sustained growth of their enterprises requires not just finding cost savings through M&A, but also differentiating their product in the marketplace, improving the customer experience, and adding to their product set and portfolio because that's what's going to create growth that's sustainable into the future.”

Essentially, she says, there needs to be a closer dialogue between executive management and their boards in terms of what the M&A agenda in their company is really focused on. Her organization’s survey backs this view, saying “Regular discussion between the board and the CFO around inorganic growth strategies and ways to implement them to achieve strategic goals could help bridge this gap.”

“In my view, it's really important for the board to have a thorough understanding of how executive management is looking at M&A to accelerate the realization of corporate strategy,” Ruggeri says. “There should be alignment between the board and management on M&A priorities. The board should not be surprised when a transaction is put forth. This suggests there probably needs to be some increased dialog between management and the board in regard to the expected goals of their M&A program.”

About Chris Ruggeri
Chris Ruggeri is a principal in the Advisory Services practice of Deloitte Financial Advisory Services LLP. With more than 20 years of experience, Chris provides clients with integrated business planning and transaction solutions. She combines strategic alternatives analysis, valuation, due diligence, financing, structuring, and deal process management.


www.deloitte.com

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