M&A value maximisation - from due diligence to finance

CFOs have long been looked to for the “stewardship of value” by their organisations, generally in regards to accounting and reporting, or operations oversight responsibilities. In the new M&A environment, the CFO is also the steward of value in the transactional setting. In this context, the CFO must achieve the desired outcome and preserve value in every phase of the deal. The CFO facilitates the due diligence process to identify and mitigate risks or exposures that could impact the transaction or the finance transformation required to realise the fullest value from the M&A post-closing. We discuss the CFO’s role as a steward in these two critical phases of a deal – due diligence and finance transformation. 

 

Due diligence for value realisation

M&A results depend on how closely the ultimate value captured from the deal mirrors the value envisioned at the beginning of the deal. The CFO is in a unique position to shepherd the projected value through to its ultimate realisation. In order to accomplish this, the CFO must take an active role in the due diligence process prior to driving the actions from projection through the realisation of actual results.

The due diligence is to mitigate overall transaction risk through the identification, quantification and substantiation of value drivers or value inhibitors, and to recognise the differences, if any. One can define a transaction value matrix, which frames the key sources of value to be derived from the target either alone or as a synergy from the combined operation. In short, when looking at the value of the target, due diligence helps identify what actually exists.

On the buy side, the CFO must substantiate the claims made by the target company, both good and bad, and identify other matters that can impact the value. The sustainable cash flows and earnings of the target company need to be evaluated and either supported or challenged. Additional questions during the diligence include: 

_ Should the potential operating risk and other contingencies of the seller be adjusted into the purchase price? 

_ How does the target company manage its business and how must that model be adjusted to operate as part of the consolidated group?

_ How does the target manage its finance function and what changes will be required?

_ Do their information systems align with the purchaser’s system and what will be the cost to integrate?

These issues should play into a CFO’s analysis of a target and preparation for life beyond the deal close. The CFO will have to develop a plan to effectively integrate the finance organisations to provide efficient but well-controlled operations and reporting.

 

Finance transformation: Some key considerations

The goal of any CFO upon a transaction should be to ensure that Day 1 post-merger is issue-free and ultimately leads to the desired value from the deal. This means ensuring that the base business is still functioning from a business continuity perspective. The CFO is also responsible for making sure that the transactions are done effectively and in compliance with regulations. Based on our experience, three major areas that generally need to be considered include:

 

Accelerating and expanding synergy capture

The CFO has an instrumental role in the synergy process. CFO facilitates the process from identifying to tracking and realising synergies. To accelerate the synergy process, leading organisations invest in clean teams to identify and develop synergy plans pre-close such that it can get to value quickly. 

 

Process and technology simplification

One of the main drivers of finance transformation during a transaction is the ability to simplify the business. This simplification can mean rationalisation control procedures, utilisation of shared service model, and focusing on the analytics that drives value for the business. 

 

Compliance

Tax and accounting compliance are major issues. The CFO will need to examine what is required to align accounting policies and make sure that consolidated reporting can be produced without disrupting the business. For cross-border transactions, the CFO should look into additional compliance requirements under such jurisdictions and ensure processes are in place to handle those requirements.

 

Learning from past mistakes

Nowadays, executives and board, demand greater assurance of business sustainability and value from deals. The CFO has to own the entire process from due diligence to finance transformation to realise value from deals. We are seeing greater demand in a majority of businesses in particular M&A transactions. For a CFO, this can create added challenges in terms of work, but can also provide huge opportunities to drive higher and more consistent returns from both acquisitions and divestitures.

 

Thavee Thaveesangsakulthai is a partner in Financial Advisory Services at Deloitte Thailand.