Bridging The Gap: CFOs And Boards’ Views On M&A

Third Quarter 2013
Corporate Board Member

When a corporation embarks on a strategic growth opportunity that involves a merger or acquisition, the communications between the board and management can make a critical difference in endeavoring to provide a smooth transaction and post-integration process.

The board has a responsibility to stay informed during a transaction, and it is most often the CFO who is taxed with delivering information and projections as well as sitting in the hot seat to answer directors’ questions.

To find out how well boards of directors are communicating with their CFOs and how well CFOs are bringing and adding value during a transaction, earlier this year Deloitte LLP engaged Corporate Board Member to conduct a survey of public company directors and CFOs serving at companies with $500 million or above in annual revenue. While both parties are charged with
overseeing risk and creating value through strategic opportunities, CFOs and board members often view these issues through different lenses. Thus, the 2013 Bridging the Gap study set out to compare, contrast, and analyze how CFOs and boards view long- and short-term strategies with regard to mergers and acquisitions.

With regard to strategic mergers and acquisitions objectives, the survey shows that CFOs are far more likely to feel the primary purpose of planned M&A is to diversify products or services (64%), compared with 45% of directors who noted this reason. Directors were more evenly split between diversification and expanding the customer base (51%) and pursuing synergies or scale efficiencies (56%). The divergence here may be due to expanded conversations board has without the presence of the CFO, where discussions on strategic ideas and long-term planning have a wider berth than those that take place in the presence of the CFO.

Not surprisingly, nearly half of directors and CFOs agree that their highest-priority concern during integration is achieving a cultural fit (47% and 51% respectively). For directors, however, the second-highest percentage of responses related to synergy capture (25%), whereas for a third of CFOs (32%) the second-highest response was customer retention and expansion.

Integration has long been one of the most difficult aspects of the transaction process, and Eric Pillmore, senior advisor, Center for Corporate Governance, Deloitte LLP, says one of the most important aspects to have in place is a means for the leadership of the two organizations to partake in detailed discussions ahead of the transaction being completed, to identify both cultural synergies as well as potential disconnects. “This helps to ensure that disconnects are identified early on and that leadership can identify the actions that can be taken to address the potential risks,” Pillmore says. In addition, he suggests companies conduct executive assessment interviews to evaluate the fit for individuals from both organizations, in the new company and their true commitment to the culture of the new company.

The following are several additional takeaways from the study:
Strategic direction alignment. Directors and CFOs are closely aligned on M&A strategy in the next 12-18 months, with the majority saying they expect to seek smaller deals to take advantage of favorable opportunities and valuations.

Target analysis. Both groups (directors, 66%; CFOs, 59%) are closely aligned in their view that overstated revenue forecasts are the number-one concern intarget valuation.

Due diligence concerns. The highest percentage of responses surrounding due diligence concerns for directors (30%) and CFOs (35%) relate to market conditions and projected cash flows/earnings.

Emerging markets investments. Fifty percent of CFOs say legal, regulatory, and compliance issues constitute the single biggest risk for investing in emerging markets. Many directors (39%) agreed, though there are more directors also concerned about political and social factors (24%) than CFOs (17%).

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