Successful integration requires a careful examination of people, systems and data – just the sort of insight FDs can bring to the table, reports Beth Ashmead Latham
Mid-market firms looking for a business boost have found M&A to be an appealing solution. Take JD Sports’ acquisition of Go Outdoors for £112m in November 2016. A year on, Go Outdoors sales had risen 5.7% after an expansion of stores – and by February 2018 turnover was up from £213.8m to £232.5m
For vendors, a merger offers access to better systems, support and cash flow; while for buyers, it can help them diversify and grow. But how can FDs and CFOs bring added value to the process?
According to Christopher Yates, group finance director from Gordon Dadds Group, early planning provides detailed knowledge of each aspect of the deal – and the chance to resolve potential problems before it’s too late.
While Gurinder Sunner, who leads the Midlands practice for investment company BGF, argues that vendors must be clear about whether they want a control investor, who helps dictate strategy and owns a majority, or a strategic partner, who has a stake but isn’t in charge. “It’s good to have a clear idea of how you want the relationship with that investor to work, and therefore pick the right investors to go and talk to,” he says.
Prepare for change
It was last autumn that Gordon Dadds LLP, part of Gordon Dadds Group, announced a merger with Ince & Co International LLP, and commenced negotiations. By January, things had changed. Gordon Dadds was to acquire Ince UK, including its Beijing and Shanghai branches, for £27.3m, with the two firms trading as Ince Gordon Dadds. The remainder of Ince International was subsequently placed in administration.
“Have a plan but be adaptive,” says Yates, who explains the evolution of its deal required clear routes to raise issues with the executive negotiating team. “It takes time and effort to communicate regularly but in our experience it’s worth the investment,” he adds. Honesty is also important on sensitive topics like restructuring. For Yates, this meant acknowledging restructuring was part of the business case. “We believe it is crucial to deal with people respectfully, openly and honestly,” he adds.
To support any M&A, many finance functions will need advisers to help because the CFO has to carry on running the business while the process goes on, explains David Petrie, ICAEW head of corporate finance. It is also important for the finance department to be properly resourced, adds Petrie, so it is able to deal with all the additional requests for information during an M&A.
Yates notes the value of professional project management support for all functional leads during integration, including finance, with focused daily calls helping to highlight and resolve cross functional issues.
Number crunching pays off
Additionally, finance functions must be all over their data, says Sunner. It is crucial to be able to highlight trends and key performance indicators (KPIs) with well-managed, historic data to meet potential buyers’ diligence requirements – as well as instilling confidence and help ensure a smoother process.
Sunner believes well-prepared companies are clear about what they want. They depend on finance functions regularly updating information, with a few key KPIs to understand what is driving the business – and so put themselves in a better position to negotiate.
Too much irrelevant information, suggests AIM-listed wealth management business AFH, can be an indication of a potentially bad vendor. Poring over reams of M&A detail is something AFH knows all about, having acquired 14 smaller businesses in 2018 alone. CFO Paul Wright confirms: “We expect potential vendors to give clear financial information about the business and the portfolios that the business is managing for their clients, going back years".
With its high levels of acquisition activity, AFH has well-established processes, including a specialised finance acquisition team within the finance function to review potential vendors’ responses to established surveys and routine conversations. The larger AFH is an attractive buyer because it employs overhead teams and frees up new acquisitions to focus on their main activity. As part of its integration acquisition model, vendors have upfront clarity about integrating systems, branding and processes.
Overpromising and underdelivering during a process is a sure-fire way of getting it to fail, which hurts confidence
The value of greatness
A great CFO can be distinguished from an average one by how they reflect their company culture, Sunner explains. Low employee churn is a good measure of a CFO’s ability to do this well. It’s also an indicator of a CFO’s emotional intelligence, and commitment to scrutinise episodes of high staff turnover. This reduces recruitment and training costs, freeing up money to create a great working environment and loyal workforce. A CFO who gets this will be much more attractive to buyers.
For Gordon Dadds Group, a “cultural and intellectual fit” is just as crucial. Yates explains: “We have been careful not to neglect the softer issues, such as corporate identity and communication, because of their impact on morale and productivity.”
This means communicating the alignment of systems and processes, which Yates notes meant a lot of effort in bringing businesses together with regular briefing sessions to share knowledge on niche parts of the business.
However, a key success factor for the buyer is knowing what they have bought. Sunner says: “Over promising and under delivering during a process is a sure-fire way of getting it to fail, which hurts confidence.”
Wright has found this goes beyond the vendor simply hitting targets. AFH’s reputation depends on good client relationships, so it scrutinises how vendors meet those targets.
Contractual mechanisms also ensure the buyer pays the right amount. Wright described a deferred payments model, where an instalment is paid up front, with remaining instalments conditional on performance, paid during an agreed period.
“We look at how they manage their clients’ money, the way they deal with clients and their investment portfolio,” says Wright. “If the business is profitable because it charges clients management fees that we wouldn’t charge, then we would not be interested because they would never meet their financial claims with the way we operate.”
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Business & Management Magazine, Issue 273, April 2019
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- 10 Apr 2019 (12: 00 AM BST)
- First published
- 17 Nov 2022 (12: 00 AM GMT)
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