MANAGEMENT

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

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?

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