The Role of the CFO in an M&A – Mastering the Art

No matter how experienced or qualified they are, CFOs will always encounter new challenges that will leave them scratching their heads.

So when Brisbane’s Mike Stabb found himself staring down the barrel of an IPO while working for a rapidly growing start-up, he knew he needed the help of his network.

“I’d never put out a share registry out to tender before, I’d never actually been a CFO for an IPO before,” he recalled.

“There’s always a problem you’ll be faced with where you just don’t know how to do it and so you reach out to people.”

The IPO was a resounding success with the business, telecommunications company Over the Wire, listing on the ASX in 2015. And the growth didn’t stop there.

Stabb achieved a 20-fold increase in revenue and an eight-fold increase in market capitalisation through both organic growth and strategic acquisitions. He delivered the primary and secondary capital raisings, and debt funding necessary to fuel the company’s acceleration.

After transitioning to mergers and acquisitions, he eventually led the sale process of Over the Wire to Aussie Broadband last year.

There were many firsts during Stabb’s eight-year tenure as CFO and then head of mergers and acquisitions at Over the Wire. He relished each new hurdle – notching up seven acquisitions, increasing revenue 20-fold to $100 million and overseeing a surge of staff from 25 to almost 300.

Looking back over his 30 years in finance, including four years at Deutsche Bank in the UK and US, and two years at Tait Radio in Brisbane, Stabb said he cemented his strengths as a leader during the middle of his career.

“It was probably the middle 10 years where that growth as a finance leader happened,” he said.

“Those first 10 years you’re paying your dues, learning the technical skills, but when I was with Deutsche and Tait Radio, that’s where I learned all the people skills, the managerial skills, how to pull together teams.

“Working overseas I had a team in London, I had a team in New York, but also shared teams in Tokyo, Singapore and Germany. You get exposed to a lot of different managers to learn from.

“You also have teams of all different cultures, different religions. So, I had team members who were Hindu, Jewish and Muslim, so I had to learn about Diwali, Eid, Hanukkah and all different things, and that teaches you how to be a good manager, it teaches you those soft skills, how to listen, learn and bring everyone together.”

Overseeing the financial growth of Over the Wire and now in a new business, The Hidden Persuaders, has allowed Stabb to see how CFOs commonly make mistakes.

He said there are two main traps to avoid.

“Getting stuck too far at either end of the spectrum – so at one end it’s CFOs who are unable to get their heads out of the weeds and can’t see the big picture or it’s CFOs who are too strategic, too big picture,” he said.

“People tell CFOs they have to think strategically, think long term, but I think this is how they almost lose touch with the teams that are under their responsibility.

“You’re going to miss opportunities or make poor decisions if you’re either lost in the weeds at one end or you’re trying to run the team at the 30,000 foot level at the other.”

Stabb’s growth-oriented approach as a CFO led him to specialise in mergers and acquisitions (M&A) – a notoriously tricky niche. Harvard Business School estimates companies spend $2 trillion on acquisitions every year, yet the M&A failure rate is between 70 per cent and 90 per cent.

“One of the biggest takeaways my team and I had from running the ruler over perhaps 10 times more potential acquisitions than those we actually made, is the need for companies and hence CFOs to plan for an eventual sale well ahead of time, and that sale includes partial sales,” he said.

“You can put a bit of lipstick on the pig in the months before a sale, check off your compliance obligations and generally get the house in order, but to really add value, you want to increase the multiplier, not just the earnings, and to increase the multiplier, improving the quality of the earnings can make a big difference.

“For example, moving from selling software to a SaaS model for example, or any change that increases contracted recurring revenue, as opposed to one-off or irregular sales. That can take time and planning to achieve.”

For Stabb, a successful M&A rests on a harmonious integration of staff. He likens the merger of two companies to apples and oranges, where the orange needs to be turned into an

apple. Rather than put the two together and then bring about change, Stabb’s theory was to change the acquired company before bringing it into the fold of the buying company.

“Every acquisition and therefore integration is different and the biggest common aspect in all deals is people because when you’re buying a business you’re generally buying the people,” he said.

“When we made an acquisition, we’d inject ourselves into the management team and go into the process of making the orange an apple over there. Then in six to 12 months time, when you actually do the integration back into head office, you’re integrating an apple with an apple so the process is smoother, less disruptive and less risky.”

Making business about people is at the heart of being an effective CFO, and also a successful M&A lead.

Learning from and leading those around you comes with experience and a honed range of interpersonal skills, he said. 

“Getting around challenges is always about people,” he said.

“I’ve hired a lot of good people over the years and they’ve spent a lot of time working hard and making me look good to be honest.

“Everything you do, you do it with people, it’s all a result of the team.”

Top five tips for CFOs managing Mergers & Acquisitions

1. The market always rewards organic growth.

Anyone can go out and buy revenue, but you really get rewarded for a business that is growing and has future organic growth. People should view acquisitions and M&A as a means to an end. That end always needs to be organic growth – be it new products, new geographies, whatever.

2. It’s not just about the size

CFOs and people should be careful if they’re making acquisitions thinking it will bring greater size and scale and operating leverage. Yes, being bigger does do that but if that’s your predominate reason, you’ll find being bigger comes with increased costs, increased complexities. You need more managers, more HR and often those costs end up eating away at our efficiencies.

3. Founders don’t usually make good employees

When you’re buying a business and the vendors are founders who built the business on their small business entrepreneurial skills and tactics, they rarely transition to life in a bigger company where they are no longer the boss. They were successful because they are entrepreneurs, not because they wanted to be an employee.

4. Do your own due diligence

I’m not saying they should do it all, CFOs still need lawyers and cybersecurity experts, but they especially need to do due diligence around people and processes. No data room is going to tell you how lean the team is running or how inefficient and manual their processes are, or whether the staff are happy or they’re quiet quitting. Spend time among the teams, look and listen and you’ll learn a lot.

5. Only buy businesses that are ready for sale

Otherwise you’re going to face those integration problems and it’s going to be on your time and your business. CFOs shouldn’t be afraid to tell a vendor, you’ve got a great business, but it’s just not ready for sale yet. Explain to them how to make it ready and hopefully it will make the sales process smoother, the due diligence shorter and you can actually then pay them more for the business. CFOs shouldn’t see that as a bad thing because there’s nothing wrong with paying more for a business that’s been de-risked.