Aligned for growth. Reporting on post-deal success

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Clinton Stevens
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1 Aligned for growth Reporting on post-deal success

Introduction Following the banking crisis of 2008 and ongoing Eurozone uncertainty, stakeholders such as investors, banks and private equity are looking closely for evidence of value creation after a

3 Introduction Following the banking crisis of 2008 and ongoing Eurozone uncertainty, stakeholders such as investors, banks and private equity are looking closely for evidence of value creation after a transaction and apply a critical lens to business performance after a deal has been completed. an M&A transaction to stakeholders is more important than ever. Finance functions must be able to gather robust information at the right time, in the right GAAP, and with the application of the right accounting policies or risk losing credibility with stakeholders. accounting and management accounting information they need? Are they planning for the integration process as early as they could or should? across Europe whose organizations have completed an M&A transaction in the last three years, looks at the approaches taken by companies in encountered, their causes and considers how to avoid these pitfalls when facing transactions in the future. Aligned for growth Reporting on post-deal success 1

Planning and sound project management are critical to effective accounting and finance integration Many respondents encountered respondents who have faced challenges integration, and those who

4 Planning and sound project management are critical to effective accounting and finance integration Many respondents encountered respondents who have faced challenges integration, and those who encountered a smoother process, best practices to integration emerge. 51% issues in relation to the integration of their 44% faced challenges with management reporting 44% with their budgeting and forecasting integration.ww 29% had problems accounting for their purchase price allocation (PPA) 2 Aligned for growth Reporting on post-deal success

5 Plan well, plan early Though the majority of respondents started planning deal completion. Planning at, or after, completion increases the likelihood of issues encountered in relation to management reporting, including the surprise of inconsistent management accounting policies across the target and lack of management reporting processes. Of respondents who had issues with management produce timely management reporting. Communicate and coordinate transaction, was a high priority among survey participants A third (33%) of respondents who faced challenges with management reporting would, in the future, seek target s management reporting processes. the right information and sharing it with key parties, was seen as a critical integration. Twenty-four percent of respondents who had due diligence in future transactions. as their leading success factor for effective post-deal and policies Of respondents who experienced issues with their with differences in the application of accounting policies management reporting cited management accounting policies different from their own as the source. Respondents highlighted the importance of aligning charts of accounts and management reporting templates, produced, which underpin a company s post-deal reporting. Aligned for growth Reporting on post-deal success 3

6 The importance of timely planning Po Financial reporting integration Management reporting 13% 15% 38% 29% 56% 49% integration or PPA. Budgeting and forecasting 14% 30% 56% Purchase price allocation (PPA) 8% 21% 71% Major issues Minor issues No issues The timing of when plans were developed impacted the success completion (late planners) experienced major unexpected planners were more than twice as likely to experience major than timely planners. statement disclosures across the target s business units or geographies A lack of adequate management reporting processes at the target The inability of the target to produce timely forecast or budget information business units or geographies information to stakeholders and, in some cases, slow down potential post-deal capital-raising activities. Our survey results help to mitigate such risks. Timing of deal planning Over 6 months before completion 11% 7% 5-6 months before completion 17% 3-4 months before completion Don t know 4% After completion 20% 19% At completion 22% 1-2 months before completion Issues experienced by planning timing Management reporting Budgeting and forecasting At/after completion Before completion At/after completion Before completion 10% 9% 25% 23% processes within the acquired business following a transaction 35% 35% 22% 23% 55% 54% 53% 56% Major issues Minor issues No issues 4 Aligned for growth Reporting on post-deal success

7 The issues encountered in the post-purchase there is going to be a person with a different culture and way of doing things. Finance director Among respondents who experienced issues in this area, 78% of Late planners were also more likely to encounter unexpected company. Among respondents experiencing unexpected issues in unexpected GAAP or accounting policy differences, compared Although the survey indicates fewer issues related to the accounting for PPAs than some other areas of post-deal understanding of the impacts that purchase accounting might have on ongoing results is important in order to avoid surprises attention to GAAP and accounting policy matters as a part of practice alignment negatively impacting reported results in future key stakeholders. Attention to GAAP and accounting differences as part of due Aligned for growth Reporting on post-deal success 5

Optimizing accounting suggest an optimal integration process, can be achieved by following a few best practices. We re paranoid about restatements.

8 Optimizing accounting suggest an optimal integration process, can be achieved by following a few best practices. We re paranoid about restatements. The accounting rules require you to publish your is quarterly. So we don t want surprises arising from the PPA. Therefore, our history has been to commence the planning even before we acquire. Plan well, plan early Undertaking more detailed discussion and planning prior to closing the transaction Beginning preparations earlier Conducting more in-depth diligence around the target s budgeting and forecasting team will account for and every transaction presents its own to control these risks. The survey results indicate that those developed early in the process, will minimize such risks relative to those without such plans. Communicate and coordinate accounting integration. Without such an approach, there is a risk that issues go unresolved, restatement risk increases, and protocols for the project. 6 Aligned for growth Reporting on post-deal success

You ve got to have proper project management discipline proper centralized ownership pulling together all of the different strands of activity.

9 You ve got to have proper project management discipline proper centralized ownership pulling together all of the different strands of activity. Stephen Heeley be required in future and making sure it feels like a partnership between the two teams, is key to success. The most important thing is to get the two teams working together as quickly as possible. Andrew Haywood They suggest the following are critical for successful company and sharing it with key stakeholders accounting and reporting challenges. Our survey results indicate need the help of external specialists to assist with rapid issue organizations meet reporting deadlines, and reduce accounting Critical success factors in post-transaction accounting integration Top responses, does not add to 100%. 21% 19% 17% 12% 6% 4% 4% 4% 4% Strong administration 2% talent issues. Close to a third (29%) of survey respondents appropriate knowledge and experience as a key challenge in the accounting integration. Aligned for growth Reporting on post-deal success 7

For both budgeting and reporting, we need to work with common rules for consolidation important to bring support not just to ask the integrating company for what we want and then to leave them alone.

10 For both budgeting and reporting, we need to work with common rules for consolidation important to bring support not just to ask the integrating company for what we want and then to leave them alone. Financial controller Belgium less of an issue for respondents in the UK, where only 48% reported these issues. issues related to the impact of purchase accounting adjustments that were not captured in the postdeal forecast, 47% of respondents in Germany Across all respondents, 53% were surprised by the integrated; however, this issue was more common with Belgian and Dutch acquirers where 74% of respondents a surprise. country practices of their target company, which can lead from the acquirer and acquiree markets early in the 8 Aligned for growth Reporting on post-deal success

11 Of the survey respondents who experienced issues with encountered unexpected differences in the application of accounting policies. Those who experienced such issues policies and procedures of the target company in their future Responses indicate that understanding the impacts of GAAP and mapping formats, aligning charts of accounts and management reporting templates. The success of this activity affects the Purchase accounting presents a one-time opportunity for conversion and policy alignment exercise creates a risk that in future periods unexpected adjustments to the income statement post deal. We recommend that companies rapidly identify areas of GAAP and policy differences and address them as part of their policies properly, and then implement related systems and has dedicated resources to perform integration, we often work in a timely manner then implement related system and process changes. A target company s systems and processes The target s chart of accounts Mapping the chart of accounts to the acquirer s Financial information used in the budgeting and forecast process costs are or what is included in a particular line. what the differences are, so that you prevent Arnout Traas Aligned for growth Reporting on post-deal success

Financial controllers at the sharp end Financial controllers are more likely than FDs, CFOs and integration, budgeting and forecasting, management reporting and PPA.

12 Financial controllers at the sharp end Financial controllers are more likely than FDs, CFOs and integration, budgeting and forecasting, management reporting and PPA. target s geographies or business units 42% of The deal model, if available, is too high level 50% most of the strain in dealing with issues that arise during challenges. issues, there is an important governance message. Accounting surprises that have the potential to create communications and damage management credibility should be escalated to the C-suite and potentially the board. Both groups need to be aware of the post-deal accounting risks associated with an acquisition to ensure such risks are being managed appropriately. Undoubtedly, raising important matters with senior management. communications and damage management credibility should be escalated to the CEO, CFO and, potentially, Acquirers of private equity (PE)-backed businesses were integration at or after completion than acquirers of listed businesses 63% of those acquiring PE-backed businesses compared with 22% of acquirers of listed companies. This may be due to the auction process and uncertainty over the acquisition outcome results in acquirers not investing substantial resource in planning until the deal is certain. they had a clear post-deal strategy to create a smooth acquirers of other businesses. 56% encountered problems with inconsistent management accounting policies across the target s business units or geographies 53% were surprised by the impact that PPA adjustments 45% were challenged by the length of the legacy close time line for the target a privately owned (not PE-backed) business started statement disclosures budgeting and forecasting process in the place at the target company management information While each integration project will have unique issues and challenges, there is a clear trend that acquiring a privately held target or a PE-backed target may present common accounting and reporting integration challenges. Acquirers of such businesses should take this into consideration when developing their integration plan, including the resources required. Acquirers of PE-backed businesses should focus on the 10 Aligned for growth Reporting on post-deal success

13 Those FDs involved in acquiring a carved-out business integration. Despite 66% having started planning before 88% were challenged by the different key performance their own accounting policies 56% had problems with the PPA adjustments The nature of the acquired business presents its own of a carve-out, because often there may not be a robust launch of the new organization. consideration to human resources needs as soon as Aligned for growth Reporting on post-deal success 11

14 So what now big deal? Every M&A transaction is unique. There is no single solution or uniform process that can be applied. But in every case, deal completion marks the start of an The successful integration of the accounting and management decision-making and to enable research shows that the principles of planning well and early, targeting the right information, effective communication and coordination, and scrutinizing accounting processes and policies can help control deal-related accounting risks. These practices pave the accounting issues, reduce the risk of restatements in subsequent reporting periods and will enhance an organization s controls associated with post-deal 12 Aligned for growth Reporting on post-deal success

15 About this report and accounting executives from 21 countries across Europe, were also conducted to explore some issues in detail. completed in the 12 months preceding the survey. Of all Total company revenues Job title of respondent Less than US$1b 1% From US$1b to US$2b 18% More than US$25b 17% Treasurer 6% Other 14% Finance director 25% From US$10b to US$25b 14% Finance manager 8% 33% From US$2b to US$5b 17% From US$5b to US$10b 9% CFO 15% Accountant 23% Financial controller How can we help? teams work continuously with clients contemplating or questions regarding the content of this document or

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Operational Transaction Services

Operational Transaction Services Contents 3 Operational transaction services 4 Integration 6 Carve outs 8 Operational and IT due diligence 10 Operational and IT restructuring 12 Why Ernst & Young 13 Contacts