How do you assess the success of a company? Most prominently, you will look at the company's fiscal health. The Chief Financial Officer (CFO) is the head honcho of all financial matters within a company.
Responsible for all things finance, the CFO ensures the company has smooth sailing through storms and lulls. As times change, the role of the CFO is evolving and taking new dimensions.
With growing opportunities for mergers and acquisitions, the role of the CFO is taking centre stage. Companies’ appetite for expansion and growth is best reflected in the drive for mergers and acquisitions (M&A). In India, the M&A market reached a whopping USD 120 billion in 2022! From HDFC Ltd. merging with HDFC Bank and the Adani Group acquiring Ambuja Cement, 2022 demonstrated the growing trend of high-profile billion-dollar M&A action.
As the future holds even more exciting possibilities for M&A activities, let’s look at what it means and the role of a CFO in the field of action.
What are Mergers and Acquisitions (M&A)?
At the heart of a company’s growth strategy is a fundamental tool- mergers and acquisitions. Mergers and acquisitions (M&A) are financial transactions between two or more businesses that lead to structural changes in the business’ order and operation. Merger refers to the process of merging or joining two or more business entities to form one new entity. Here, all former business entities cease to exist, and the assets, liabilities, and operations are brought under the ambit of one company.
In contrast, acquisitions refer to a situation where one company absorbs or acquires a smaller company, its assets, liabilities, and operations. The acquirer is often a giant corporation that owns financial strength. As the smaller company ceases to exist, its assets and operations are acquired by the larger company upon completion of the acquisition.
Why are Mergers and Acquisitions Important?
Mergers and acquisitions (M&A) are critical in solidifying the growth trajectory of organisations. Here are reasons organisations decide in favour of M&A:
- To achieve business growth.
- To diversify products and services.
- To eliminate competition or enter new markets.
- To acquire assets.
- To reorganise the company.
- To synergise and achieve economies of scale.
- To avail of tax benefits.
Role of a Chief Financial Officer (CFO)
A Chief Financial Officer (CFO) is part of the all-powerful C-Suite. In consultation with the CEO, the CFO is the supreme authority of the financial branch of an organisation. CFOs drive the growth story of an organisation by ensuring its financial health through innovative strategies, financial planning, and constant vigilance of financial operations.
Let’s look at the multiple roles played by a CFO:
- Analysing and reporting financial data.
- Assessing financial risks and managing them.
- Economic forecasting and planning.
- Fulfilling treasury duties.
- Ensuring compliance.
- Liasoning with financial actors.
- Consulting on mergers and acquisitions (M&A).
CFO’s Role in Mergers and Acquisitions
The financial acumen of a CFO and their role as a strategic partner in steering business growth make them an indispensable part of an organisation’s M&A process.
Take a look at the role of a CFO throughout the process:
The first step in an M&A is identifying the organisation to be merged with or acquired. The CFO has to step up and advise the C-Suite on the fit of an organisation to its own business objectives and vision.
Evaluating the company:
Companies have to undergo a vetting process before going forward with M&A. The CFO has to evaluate the financial pros and cons of the proposed deal by poring over the finances with a hawk eye and reporting it to the C-Suite.
Developing the transaction plan:
Once an organisation has received the thumbs-up from a financial perspective, a transaction plan has to be developed. This is the domain of the CFO, who has to present an extensive outline to the stakeholder on the impact of the deal on the organisation.
Playing the role of chief negotiator:
On both the buyers' and sellers’-side, the CFO plays the strategic role of a chief negotiator. They are responsible for ensuring an optimal deal and maximising synergy. The constant back and forth between CFOs of both sides is integral to achieving the smooth execution of the M&A cycle.
Executing the integration plan:
Closing the M&A cycle smoothly is paramount to realising the objectives of the plan. The CFO plays a critical role in the synergy management process to meet the project's goals. They have to ensure the financial operations and performance are creating value through an efficient integration plan.
Monitoring and managing risks:
Even after the M&A cycle is complete, the CFO has to monitor the financial performance, report on value creation, and identify and mitigate financial risks.
The CFO is at the heart of the M&A cycle. The expertise of the financial top hat of an organisation can make or break a merger or acquisition. To drive M&A deals that reshape an organisation’s history, CFOs have to stay on their toes and constantly upskill through top CFO Programs.
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