Accounting for Value in M&A

A lack of insight into the challenges associated with consolidating financial practices means organisations are struggling to achieve the desired goals of M&A says Gary Waylett.

A lack of insight into the challenges associated with consolidating financial practices means organisations are struggling to achieve the desired goals of M&A says Gary Waylett.

With organic growth becoming ever harder to achieve, merger and acquisition activity is on the rise, believes Gary Waylett, chief executive officer of Eclipse Group. But with a lack of insight into the challenges associated with consolidating financial practices, organisations are struggling to achieve the desired goals.

It is those organisations that restructure accounts and streamline their processes to achieve consistent financial management that will be best placed to maximise the value of the M&A and achieve the growth required in what remains a difficult international economic landscape.

Confidence to global economies in 2010

A return of confidence to global economies prompted a 23.1 per cent rise in M&A activity in 2010, according to figures from Thomson Reuters. This increase is driven by a number of factors, not least the view that having cut costs to the bone over the past three years, growth can only be achieved through non-organic expansion.

But with international markets still showing mixed growth patterns, organisations are under huge pressure to make these acquisitions deliver measurable corporate value in a tight timeframe. There is a drive to achieve rapid synergy, consolidate operational departments including HR, finance and IT, and leverage new economies of scale to improve competitive position and market reach.

One of the key components of this success will be both excellent financial control and effective regulatory compliance across diverse national markets. Yet how many organisations are prioritising consolidation of financial accounting processes and the creation of standardised international accounting post M&A? Indeed, how many are really considering the challenges of divergent processes and consolidating different finance systems when determining the viability of the proposed deal?

Failure to look closely at this area; to really understand the challenges involved will undoubtedly make it tough to gain the required depth of financial reporting and cause measurable delay in realising some of the objectives of the M&A.

Lack of insight with consolidating finances

Despite the increase in M&A activity, there remains a clear lack of expertise and understanding about the challenges associated with consolidating the finances of two disparate organisations. Obviously there are some issues that can make that challenge more difficult: different geographic locations introduce the problem of multi-currency reconciliation, language support for IT solutions and multiple compliance requirements; while the consolidation of two UK based companies using the same finance software will be far easier to manage.

However, organisations need to look beyond the basic goal of creating a standard Chart of Accounts. Indeed, too many assume that because they are producing statutory reports in a standard format, there is no problem. But this is typically achieved in a somewhat clumsy fashion because these organisations are highly unlikely to have the same coding structure.

The existing Chart of Accounts has to be remapped to the required reporting format and there is often a need to include additional information that is not held within the finance system. Typically, the required reports are produced through the use of spreadsheets, meaning there is no audit trail available and calculations are open to overtyping and manual errors.

For any organisation attempting to rapidly attain the desired objectives of M&A activity, failure to address these issues causes significant problems. Critically, reporting becomes time consuming and potentially less accurate.   From a day-to-day management reporting perspective, not being able to make valid comparisons is a real problem and one that makes some types of reporting impossible.

For example, organisations need to rapidly understand the performance of key operations departments that are likely to be consolidated – such as HR and finance.  Yet without clarifying accounting procedures, such as whether the cost of the HR department is allocated across divisions/ departments based on headcount or managed within its own cost centre, it is impossible to make any meaningful comparison.

Planning ahead

Given the growing emphasis on M&A to fuel growth, organisations cannot afford to take this issue so lightly. The adoption of a single international standard for financial software is clearly key to enabling the creation of strong financial controls, minimising the administrative overhead associated with consolidating quarterly and year end accounts and improving visibility of critical financial performance.

As soon as an acquisition takes place – or even better, before the acquisition – it is essential that ALL coding structures are synchronised at the earliest possible time. Indeed, in those very few cases where restructuring the finance system is part of the acquisition terms the benefits are significant.

For most M&A, however, this consolidation may need to be achieved in stages. Starting with the Chart of Accounts, which will be relatively straightforward; followed by departmental/cost centre/divisional alignment which may be more difficult as there is normally some form of consolidation of roles/processes at the time of merger. Nor is there any rule that it is the processes of the acquiring company that should be adopted: in depth assessment of existing processes is key to determine the best approach.

Companies need to take a flexible approach and recognise the quality of different finance processes – even opting to totally change the structures used by the new merged organisation if required to support the demands of a far larger company. The ultimate goal, however, must be to achieve consistency within the shortest timeframe possible.

Todd Cardy

Todd Cardy

Todd was Editor of between 2010 and 2011 as well as being responsible for publishing our digital and printed magazines focusing on private equity and venture capital.

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