M&A: Why finance is key for the pre-deal and integration phase

According to a study by PwC, the finance function plays a crucial role in the success of mergers & acquisitions. Not just in the post-deal or carve-out phase following closing, but also in the pre-deal phase. 

Kicking off one of the two main conclusions, PwC’s lead author of the report Stefan Lindwehr said: “Our survey results indicate that it is essential to both involve the finance function early and empower finance representatives to take ownership of specific areas of a deal.” 

Pre-deal

Based on a survey of 80 leaders in M&A and Finance, PwC found that the success of an overall transaction strongly correlates with early involvement. When the finance function was a key part of the deals team, almost 80% of the companies were able to achieve deal success. In cases where the CFO and his team were hardly involved or not involved at all, the overall success rate dropped to just over half (54%).

There are several reasons why finance adds value in the strategic and dealmaking phases in the run-up to closing. It starts with providing the fundament for M&A strategies, said Claude Fuhrer, a partner at PwC in Switzerland. “Financial data is among the most critical information in a transaction. Paired with commercial analysis, buyers and sellers can rely on this data to negotiate the terms of the deal and perform a due diligence. The finance function is the best match for this task.”

Second, finance is the linking pin between the financial impact of the deal and the overall strategy and budget. Further, the function plays a major role in informing others on their decision-making, including top management, deal teams and in some cases antitrust authorities. “Finance expertise and knowledge are extremely important for dealmaking processes, and hence for a successful transaction,” explained Fuhrer. 

PwC’s survey shows that once finance is involved, the majority of companies puts the function in charge of preparing the transaction (80%) and leading financial due diligence (71%), while 68% of respondents entrusts the finance function with valuation and modelling.

Christian Jöhnk, a Partner at PwC in Germany stated: “The finance function is a well-connected key function in any organisation, collaborating with a variety of other areas on critical long-term tasks as well as in day-to-day business – from budgeting to management reporting. This makes the finance function an ideal hub for preparing and coordinating transaction-related activities prior to a deal.”

Post-deal

In the post-deal phase, or merger-integration / carve-out phase, the finance function has two roles to play. For starters, a role as an enabler of key deal drivers, which if done well leads to value creation. Finance teams plays a vital role when it comes to project organisation and decision-making. In over one third of the integrations/carve-outs PwC examined, finance was appointed the role of overall project owner. 

Cross-functional work stream coordination is another area in which is well suited to the finance function. For example, the survey found that two thirds of organisations assigned the task of integrating or separating legal entities to the finance department – with tangible results. A high degree of leadership by finance in the area of legal integration / separation is correlated to the overall transaction success rate. 

Another area where finance can add significant value is in benefit management (or synergy management) – an important task in the overall deal process to ensure that all functions deliver the growth, profitability and efficiency potentials of the deal. “Finance works on a daily basis with other cost management functions and has access to all the necessary data, so it makes most sense to entrust the function with this task,” said Danny Siemes, a Senior Director at PwC in the Netherlands.

Survey results show that the finance function had either complete ownership of or was heavily involved in about 60% of all synergy-related activities. This process ideally is end-to-end, from identifying, tracking and quantifying synergies to working with other functions on realisation and monitoring. Putting finance in charge of synergy management was found to be a driver of deal return on investment. 

Managing its own integration / separation

The second role of finance in the post-closing phase is ensuring that its own function successfully transitions to the NewCo state. Here, PwC found that a successful integration or carve-out of the finance function itself strongly correlates with the success of the transaction as a whole: 87% of respondents who were successful in this task also experienced overall transaction success. 

Conversely, businesses which acknowledged that their finance integration / separation did not go according to plan were much less likely to achieve a successful overall transaction (46%). This is in part because successful finance teams enable the organisation as a whole to speed up the execution phase, with more than half of the transactions occurring faster than initially planned in the case of finance excellence. 

This in turn leads to a higher return on investment. Fuhrer: “Speedy execution allows the organisation to quickly return to its day-to-day business. As a result, the organisation will reap the benefits of the deal earlier than planned, achieving the planned ROI target.” 

Success factors

The authors highlight that finance also has a role to play in the overall change management of a transition, which “is a critical success factor during all the phases of a deal. Businesses need to thoroughly plan and carefully implement change management measures, with the goal of stabilising the organisation throughout the deal.” 

In practice, this means that change management should create an understanding of the deal strategy, and prepare employees for the upcoming changes and critical milestones, with the goal of building a case for change, commitment and removing barriers for change.

In PwC’s survey, successful finance teams were more likely to apply change management interventions, including regular and early communication, timely leadership appointments, policies for employee retention and learning & development. 

Other key success factors for finance along the M&A lifecycle include putting into place clear roles & responsibilities, the use of data analytics to drive fact-based decision-making, keeping a close eye on continuous cross-functional alignment, support from the CFO, and continuous synergy tracking combined with informing other functions on where they need to improve and adapt.