Reminder to CFOs: In M&A, Finance Integration Is a Deal Necessity

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M&A is often seen as an effective way to enter new markets, support growth and create value. However, not all deals achieve these goals. An analysis by EY of more than 2,000 deals that were completed between 2012 and 2015 showed that over 70% of these transactions actually led to erosion of value in the few years following the acquisition.

But what we also found is that the outcome of a merger can be predicted. Success can usually be expected based on two factors: doing the right deal and doing the deal right. In other words, the target needs to be a good strategic fit, and the integration must be well-executed.

Interestingly, while most companies have teams focusing on strategy and identifying the right deals, fewer have teams that are dedicated to integration.

In fact, a poll by EY of over 40 corporate executives that was conducted in November 2017 found that 60% of the respondents only partially integrate or do not integrate the acquired firms into the larger organization following the M&A. As a result, these companies end up delaying or even losing the realization of value.

To be successful in post-merger integration, the finance function must focus on three fundamental areas: ensuring business continuity, taking control, and realizing value

Prioritize finance

Many reasons could account for this outcome, including lack of leadership, loss of momentum or inadequate resources committed throughout the integration process.

Because mergers are disruptive for the acquiring company as well as the target, companies need to clearly define what they are trying to accomplish with the integration effort and prioritize their focus on the most important issues. Respondents to the EY poll identified operations, followed by sales and marketing, as the two most important functional areas for integration.

With growth as the main driver of M&As, it is not surprising that companies are prioritizing operations and sales and marketing over back-office functions for integration.

Yet, the finance team is usually one of the most heavily affected functions in a merger. From an accounting perspective, integration – or at least interaction – is required to enable the production of statutory consolidated financial statements.

More importantly, this consolidated view of the business is essential to drive the business and create value. In that sense, finance integration must be a prerequisite for all acquisitions.

Continuity, control and value

To be successful, companies must focus on three fundamental areas: ensuring business continuity, taking control, and realizing value.

First and foremost, the team looking at finance integration must ensure that business continues to operate without disruption. After the deal goes live, the integration can be considered a success if the finance team is able to invoice customers and receive cash, close the books and report to external stakeholders.

Processes do not have to be perfect and manual workarounds can be tolerated as long as business is not disrupted. Any initiative that could pose a threat to conducting business as usual should be put on hold until the business stabilizes.

It is also important for the integration team to take control of key processes. Integration introduces new people, new processes, and new systems. It is a time of change and uncertainty.

For this reason, the finance team should focus on quickly understanding the new environment and put in place the right controls for the business. For example, who are the bank account signatories? Who can authorize payments?

While we do not recommend companies to try and harmonize all the controls in the organization immediately, it is essential to take control of all the cash inflows and outflows early on. This control of treasury should help to maintain working capital efficiency and potentially allow for the investment of excess cash.  

Finally, and only once business continuity is ensured, the integration team should focus on realizing the deal’s synergies. Finance has a key role to play in this for two reasons:

First, integrating some of the finance back-office capabilities is usually an easy way to achieve cost synergies.

Second, finance has responsibility for tracking and driving synergies, partnering with the commercial team and the board to give the visibility that is required to steer the business in the right direction. To do so, the finance team should work on integrating and improving the finance systems to enable the production of group-wide reports efficiently.

While business continuity should always be the number one focus, any merger is also a great opportunity to transform the finance function . . . and improve the reporting structure by adding more granularity to drive better insights

Early planning is critical

The good news is that while finance integration is time-consuming and complex, it is also a fairly standardized exercise. With the right approach, early planning and strong governance, the finance team can successfully support the entire organization through a seamless transition.

Integration planning should start long before the deal closes to avoid business disruption. Even when access to the acquisition target is limited before close, our experience is that there is significant value in starting planning right after the deal is signed.

Typically, the activities that should happen prior to deal closure include:

  • identifying integration “hotspots”, i.e., risk areas for deal close and coming up with mitigating actions
  • starting to define the post-close finance organization structure
  • defining to-be operating model and service delivery model
  • preparing a detailed cutover plan with all the activities, owners and deadlines

Having a strong Integration Management Office (IMO) is another key driver of integration success. That’s because a lot of activities need to take place during integration. Just for finance alone, an integration plan would typically comprise several hundred activities.

The IMO will drive the integration effort, own the planning and the execution, and work with the finance functional teams to maintain a disciplined process and focus on value. The IMO team should also share leading practices, and drive momentum and a sense of urgency.

Opportunity for finance transformation

While business continuity should always be the number one focus, any merger is also a great opportunity to transform the finance function. The target may have some policies or processes that could be worth adopting. In a merger of equals, it can sometimes even make sense to design and implement a completely new operating model for both companies.

The integration is also an opportunity to improve the reporting structure by adding more granularity to drive better insights. Like any disruption, integration can be perceived as a threat. However, when carried out well, it can pave the way for future growth.

About the Authors

Karambir Anand is Partner and EY Asean Leader, Strategy and Transformation, and Xavier Saynac is Associate Director, Transaction Advisory Services at Ernst & Young Solutions LLP. The views in this article are those of the authors and do not necessarily reflect the views of the global EY organization or its member firms.

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