James Brown FCPA, shares his tips and experience for the mergers and acquisitions process, as the CFO of Foodland Associated Limited which recently demerged its New Zealand and Australian operations and entered into a scheme of arrangement with Metcash Trading and Woolworths to acquire the separate business operations.
Q.
What is your approach for setting a financial criteria for acquisitions?
A.
Our strategic plan was to build scale and size which is essential in retail, and to that end we approached Metcash Trading during 2004. In late 2004 in response to our approaches Metcash launched a hostile bid for a portion of the company. During the response to this hostile bid, it was determined that our shareholders would be best served by demerging the Australian and New Zealand operations.
The first and most important aspect when you look to acquire or demerge the operations of a company is to critically analyse whether it is in the best interest of your shareholders.
When we pursued acquisitions there were two key aspects we looked at. One being does this acquisition make financial sense. Will we get a return through this transaction greater than the cost of capital? Will the acquisition create value for our shareholders?
The second aspect, is the strategic imperative of doing a transaction, and how does the transaction fit with the Groups objectives, plans and competencies
Q.
What are the usual key drivers in your analysis for establishing value of an acquisition target?
A.
Cash flow. If there is insufficient cash flow to support the acquisition, then there is no value creation and its not going to happen.
Q.
There have been a number of concerns raised recently about the weight of money driving private equity firms to bid up asset prices. Is that an issue to you and what is your response?
A.
At the end of the day, if theyre pushing up the price of assets then it can only be to the shareholders advantage, and sets a benchmark for what the market is willing to pay for the business. I do not subscribe to the thought that private equity pays too much for assets because of their leveraging ability they still have to recover their equity and debt when they sell down in three to five years time. But quite frankly if a company within the same market can not drive enough synergies and growth out of an acquisition to more than adequately compete against private equity, then it signals a very interesting story about the company and the market they operate in. During the Foodland process we had private equity participating, however the synergies that Woolworths and Metcash could gain along with the strategic advantage of owning our valuable assets, was clearly in excess of the leveraging advantage of private equity.
Q.
What is the role of the CFO during the merger / acquisition process?
A.
They play several roles. First of all, they are the key to the negotiation of the deal and they are absolutely essential to the structuring of the acquisition. The wrong structure can leave you with all kinds of problems: tax problems, legal problems, inflexible structures etc. The CFO is also key to the shareholder value proposition. Without the CFO doing their role you could end up losing a significant amount of value because you pay too much. The CFO acts as a financial conscious and makes sure that the return is there for shareholders.
Q.
How do you go about integrating the acquisition target with your business?
A.
Its very much a methodical and structured process. The way we approached integration is by breaking the integration into the various key functional components or core areas i.e. retail or front end, IT, HR, operations, marketing, finance, property etc.
You look at the operational side of things and you use the normal tools of process and operational mapping, identify the key areas, people and process, and gauge the risk of change (or the lack of change) and the speed of implementation.
You review the HR component not just the alignment of people and structures etc but the alignment of culture. That can be just as important because the value of an organisation is not just its customers, it is the staff, the teams that deliver the customers. Lose the people, you lose what youre actually paying for.
And you look at the finance what is where, how its getting reported and making sure youve got the relevant and timely data. Integration is about making sure when you put the two organisations together you are still looking at the same data and can still understand the key business drivers, the business language and outputs. Otherwise you end up running almost two different businesses and you lose your synergies.
You must have a dedicated team that is responsible for the integration from start to finish. The best integration teams are also those who once the integration is completed are also responsible for the running of the business a great way to align the integration responsibilities to the ongoing operational accountabilities.
At the end of the day its must be led from the top, all the way through. For a successful integration, you have to have a very clear objective and vision of what your 100 day (or what ever your integration timeline line) plan is this gives you focus and objectives. When leading from the top youve got the requisite focus. You also need to ensure the integration effort is not done in silos or pillars that is a recipe for disaster as you internally compete against each other. It must be a whole of business approach.
Q.
How do you determine if the merger / acquisition was a success?
A.
You start looking at your return on your capital. It is basic analysis how much capital did I put in, what it worth is now, and how much cash is it generating
Youll also have soft measures like retention of customers, customer penetration or increase in turnover but at the end of the day its all about what cash did you get out of it and where did that cash get generated from. You have to make sure that when you do your integration you also go back to your due diligence acquisition model how do I now stack up against the decision to buy financials. If youve done it properly the key metrics from the decision to buy proposition should be identifiable and measurable from day 1 and you measure these against the actual outputs at a latter date.
