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Why accountants are a big deal when landing the big deals

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As global mergers and acquisitions get set to accelerate over the coming years, accountants will find themselves busy. So what makes a great M&A accountant?

In December the FT cast its eye over the global mergers and acquisitions landscape for 2018, reporting that, in almost every sector, the outlook is buoyant. M&A activity in 2017 exceeded $3tn for the fourth consecutive year and is on course to see an ‘unprecedented wave of dealmaking’. Even the most cursory research shows a consensus among commentators that 2018 will be a big year for big deals.

With accountants arguably the glue that holds M&A deals together, what should accountancy professionals know about these mega-deals and what are the upcoming trends for the sector?

The Director of Cambridge Judge Business School’s new Master of Accounting programme, Dr Mike Willis, points to financial competence on both sides of any deal as paramount, and accountants as key to getting this right:

“Mergers and acquisitions can be massive, complicated transactions, with significant opportunities for value creation but also significant risk. It is crucial that all the pre-merger strategy, analysis, and forecasting, as well as the post-merger integration be conducted competently. Put simply, M&A are big deals and firms had better get them right. Accountants are a big part of putting organisations in the best position to pull them off successfully.”

BP's Rob Lawson photographed at BP St James Square. Photographer: Graham Trott Tel: 44 (0)7836 227278

Rob Lawson, Global Head of M&A at BP

The accountant plays a crucial role in all aspects of the M&A process from regulatory requirements and due diligence to financial analysis and coordination. For Rob Lawson, Global Head of M&A at BP, there are some fundamentals for accountants to remember as they play their part in setting up a truly strategic approach to any M&A deal:

“The most important strategic aspect of an acquisition is to ensure that it fits with a pre-ordained strategy and that it isn’t just an opportunistic event. Strategic fit might be about bolting on to existing assets or about accessing new markets, technology or capabilities. Once validated as having strategic fit, I always think of an acquisition in terms of three time horizons. In the near term, does it fit with the financial frame and constraints of the firm (can we afford it)? In the medium term, does it deliver value and sufficient returns to the firm through synergies and growth (will it be profitable)? In the long term, does the acquisition provide additional growth options – is there a chance of upside beyond base economics?”

To reach the right decision on whether to move on an M&A, Rob recommends taking time to think through all possible viewpoints on the deal:

“The types of analysis performed in evaluating a potential acquisition are well documented in corporate finance literature and are fairly standard. The important element is that it is all about standing back and assessing the acquisition through multiple lenses. We would always look at discounted cash flow analysis and the returns we would expect to receive from a deal. In addition, we analyse entities similar to the target trade and the multiples that have been used in comparable transactions. We also put ourselves in the shoes of competing buyers and the seller to form a view as to how competitors might act and to understand seller expectations.”

With financial reporting and valuation vital in coming to a decision to press ‘go’ on a deal, the role of accountants is key in enabling the final decision-makers to reach a deep understanding of the numbers:

“It’s all about forming a view as to how reliable and trustworthy the financial numbers are. Ultimately, we need to take the seller’s portrayal of the numbers and convert them into a form consistent with our own methodology and accounting standard. Accountants can play a critical role in terms of challenging financial assumptions and bringing clarity to the way that our balance sheet and financials will ultimately be impacted as a buyer. We need judgment as to the quality of the numbers provided and accountants can provide advice on how risks can be mitigated through reps, warranties and indemnities.”

Although the numbers are crucial in M&A, there are softer skills which are essential for anyone taking a leadership role in the acquisition process:

“Relationship skills are vital. When we’re buying an asset from a counterparty, we always talk about the importance of the other side wanting to do repeat business with us. That means we need the utmost integrity at all times, strong interpersonal skills and a long-term perspective: it’s not all about winning the deal in front of us, but about building long-term trust. Similarly, deal doers need to have the emotional awareness and listening skills to be able to read the other side, determine what’s important to them and uncover where we might be able to find common interest.”

Emerging trends in M&A are set to keep accountants busy. Almost every industry is undergoing some type of disruption, mainly in terms of grappling with technological change and the challenges of competing in global markets. This is driving organisations to go after strategic assets that will fill gaps in their existing offering and position them to remain competitive into the future. Rob notes some other gathering trends accountants should be aware of:

“Accountants are well-aware that it is becoming increasingly difficult for firms to use the auditor in any capacity beyond the audit. In BP’s world, oil and gas deals are seeing much more use of contingent payments (often tied to the oil price) and the retention of certain liabilities (especially decommissioning) by the seller.”

Firms will continue to seek growth through M&A for the foreseeable future. For accountants involved in the M&A process, knowledge of accounting standards is a good start, but there is much more opportunity to add value. They must aggressively challenge assumptions and estimates in financial statements and analyses. They must ask the question “why?” almost incessantly. This mindset is a cornerstone of the curriculum and culture of the Cambridge MAcc.