The Business of Buying


As Seen in CFO Studio Magazine Q4 2016 Issue




They say there’s more than one way to skin a cat, but when it comes to buying a business, it’s best to follow a tried-and-true formula. That’s the advice of Craig Steeneck, CFO of Pinnacle Foods, a branded foods company that has gobbled up four multimillion-dollar household names —Birds Eye and Wish-Bone among them— in the past five years. “We have an acquisition manual that we call our ‘playbook,’ and every time we purchase and integrate a new business into our own, we use it.”

Mr. Steeneck spoke on “Valuation and Integration —Keys to Successful Buy-side M&A” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Roots Steakhouse in Morristown, NJ. CFOs from select New Jersey–area companies attended the invitation-only dinner.

Mr. Steeneck said his company has been “highly acquisitive” over the past several years, and “by sticking to an MO that has consistently worked for us, we continue to outpace our competitors in the industry.” He shared his recipe for success with dinner attendees, going through his “playbook” page by page, from beginning to end.

“When a business goes on the market, the first thing you need to do is determine how much it’s worth and what you should be paying for it.” Mr. Steeneck said he relies heavily on support from outside resources to come up with that valuation, and highly recommends this tactic. “I work closely with external bankers and people in the industry to be aware of what’s being sold and for how much. This is one of the most important things I do.”

He also advised completing a five-year forecast, including cash flow, to come up to a discounted cash flow. And then benchmark what that five-year free cash flow translates to against other deals that have occurred in the marketplace in order to help determine what to pay for the business. He cautioned attendees to keep in mind that, these days, companies don’t come cheap. “Acquisitions are more expensive now than they’ve been for quite some time. In fact, they’re at an all-time high, particularly in the food industry.”

Searching for Synergies

The only way to justify paying a premium to acquire a business, Mr. Steeneck noted, is with cost synergies, which translates to the elimination of duplicative Sales, General, and Administrative Costs, or SG&A costs; in other words, the purchase reduces overhead expenses and head count. And don’t overlook the scale benefit, he added, that is achieved from the supply chain. “Adding the weight of the new company’s product to my truck, for instance, allows me to reduce my overall shipping costs.”

Once a price is negotiated and both sides are ready to shake on it, the buyer should do a hefty amount of due diligence before signing on the dotted line. “Kick the tires,” Mr. Steeneck advised. “Understand exactly what you’re getting.”

When a deal is finally in place, it’s time to set a plan for integration—and it must include a timeline. “Do whatever you can to execute that timeline and put the newly purchased company on your platform as quickly as possible” after the acquisition. He said, “If you leave it dangling out there on its own and separate, you don’t get the cost savings as soon.” Plus, he pointed out, “You could allow for some bad practices that the company might have employed in the past to continue.” Also, bringing products together in cross-promotional efforts (e.g. bagels and spread) will help to drive revenue.

Again, Mr. Steeneck advised seeking “outside help” to organize and structure the integration, in an attempt to “stay on course and integrate as quickly as possible” in order to realize the cost savings. “It’s very difficult to get people to focus on their day job while trying to do all of this integration work” on the acquisition, he said. “Flex up your resources with consultants who will help you meet your very fast and aggressive timeline.” Otherwise, he cautioned, “something will go afoul with either the base business or the newly acquired one.”

The View from the Top

Mr. Steeneck spends about 25 percent of his time on M&A-related activities, including sourcing possible acquisition opportunities, and performing due diligence on integration efforts. “One of the most important things I do as CFO is look for acquisitions. I keep my ear to the ground as I go through the rest of my day-to-day, making sure I’m always aware of what’s happening in the industry in terms of available assets and when they’re coming up for sale.”

He said this is something that is very much managed “at the top of the house” at Pinnacle Foods, noting that the CEO joins him in such endeavors. “We are always in the market and prospecting, while keeping everyone else focused on their daily workload.”

David Chambers, Vice President and CFO of Jaguar Land Rover North America, attended the dinner and in an interview afterwards expressed surprise over how involved Mr. Steeneck and his CEO are in the process. “Most companies likely employ an M&A team to identify opportunities, and then bring them forward to the CFO for review, and finally up to the CEO and the Board.” He thinks the Pinnacle way makes better sense. “They do it together, and so there is alignment from the beginning, which makes for a more efficient process.”

Mr. Chambers noted that “All CFOs look for benefits from an acquisition, but realizing them is not always as easy.” The way Mr. Steeneck operates, “he has this intimate knowledge with a hands-on approach, so that leads to a higher level of success.”

In an interview, Ralf Hermkens, Executive Consultant/Principal at Hermkens Consulting, LLC, called Mr. Steeneck’s playbook “invaluable.” As someone who has successfully completed multiple acquisitions and integrations in his own career, Mr. Hermkens added that Mr. Steeneck’s best practices are “easily transferable to other sectors.”

Mr. Steeneck agreed, adding, “You have to be disciplined and regimented in order to stick to it and make it work.” And that holds true, he said, no matter where you work.

Today’s CFO


As Seen in CFO Studio Magazine Q4 2016 Issue




“A business that is not growing is probably a business that is dying.” Strong words from Arlen Shenkman, CFO of SAP North America, the world’s largest enterprise application software company, and a CFO Studio Business Development Partner. And he’s not done: “The demise rests squarely on the CFO’s shoulders, at least in part, if all he does is stare at spreadsheets.”

Mr. Shenkman spoke on “Operations, Risk, and Finance: The CFO as Growth Strategist” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently in the SAP Suite at Levi’s Stadium in Santa Clara, CA. CFOs from select Bay Area companies attended the invitation-only dinner.

He opened the discussion by asking those in attendance to join him in recognizing how the job description of a chief financial officer has evolved over the years and across industries to the point that “the CFO is far more than the steward of the assets of a business, or in place solely to ensure compliance and assess risk.”

Mr. Shenkman noticed heads nodding rapidly in agreement, so he continued: “These days, anyone who wants to be a CFO must understand that the role is much more multifaceted than it ever has been, and in order to be effective, you need to understand — and be able to explain — your business model, value drivers, competitive differentiators, and your customer needs, as well as the strategies that are in play.”

That means today’s CFO has to stand ready to “help the business determine the most advantageous way to continue growing.” In other words, and “this is key,” he said: “The CFO must decide on the strategy of the business to ultimately ensure its long-term vitality, while at the same time helping the organization understand the financial ramifications of those strategic decisions.” That’s a heavy portrayal of the job, he acknowledged, and one that, like so many in the current environment, requires a balancing act. “Keeping the company strategy in mind, CFOs have to determine how they can align the financial return for the shareholders with the long-term growth prospects of the business.”

Stepping It Up

Mr. Shenkman noted that this characterization of the finance leader’s role is a radical shift away from the traditional and stereotypical description of the CFO as the prototypical “bean counter,” and opined that it’s due, partly, to the “automation” of certain aspects of the job. “There is a piece of what, historically, a CFO would do around reconciliation and aggregation of data that is now addressed in our systems and analytics that, frankly, free up the CFO’s time to be more proactive in operating or running a business.” And the best way to be action-oriented with an eye to the future, he said, is to “understand where the business is headed, rather than just merely looking back at the numbers and knowing where it’s been.”

Francois Delepine, CFO of Venafi, a cybersecurity software company, attended the dinner and in an interview afterwards summed up Mr. Shenkman’s assessment of the current role of the CFO by simply saying, “The job of the CFO is to be a problem solver and to find solutions,” while Liyuan Woo, former CFO of Bebe Stores, an upscale fashion retailer, went a step further and likened the modern-day CFO’s role to that of a “co-pilot to the CEO and other senior executives.” In her view, “the Board and the CEO are looking to the CFO more and more to really drive strategies and direction for the company.”

Ms. Woo had a theory about the CFO’s more demanding job description: “Traditionally, the CFO has been seen as a very objective person who comes to the table from the rational side that deals with the numbers. Given that knowledge base and, typically, a very even-keeled temperament, there is much more of a push for the CFO to be the change agent for the organization, to kind of rally the troops and work with senior-level counterparts to make sure everyone is executing in the same direction.”

Peter Derrick, who runs his own CFO consultancy, Peter Derrick, LLC, said that the conversation “struck a chord” with him. “I always considered my role as one of a key strategist and as a change agent and growth agent for a company.” But he added that not everyone sings his same tune. “I’ve certainly been around long enough to know that some stakeholders embrace that and others do not.”

He admits it was quite difficult at times, over the years, to get people to understand where he was coming from, but “it’s become easier and more common now for the CFO to operate in the ways in which I have consistently done, because I think there is a greater recognition broadly with shareholders and Board members to that evolving and growing role.”

The Malfeasance Theory

Paul Kirincich, CFO for One Medical Group, said in an interview after the dinner: “The way I see it, there’s now a COO component to the current-day CFO role.” And he, too, had a theory: After Enron, a 2001 scandal in which top executives at the Texas energy company hid billions of dollars in debt from auditors and the Board of Directors, “there was such an excessive amount of attention on compliance and control and fraud prevention, which caused all of us to be more narrowly focused to avoid a similar scandal.”

Mr. Kirincich pointed out that the business economy has been operating for some time now under the controls put in place by the U.S. Securities and Exchange Commission (SEC) following Enron, and “things are relatively stable, so CFOs can focus more broadly now than we did 10 years ago.”

Mr. Shenkman said that CFOs today have more systems at the ready to address those necessary and critical operations like internal controls and processes, but cautioned attendees to “keep their eye on the ball,” pointing out that, “Compliance, risk, and accuracy of financial statements are the price of admission. These are your core responsibilities; they are foundational. And the more diverse and global your business is, the more complicated it gets.” He went on: “If you’re a great CFO who understands the strategy of your business, but your financials are wrong and you have a compliance issue, you’re probably not going to be a CFO for very long.”

Pointing out that industry-wide acceptance and recognition of the CFO as a growth strategist within an organization doesn’t necessarily come with a free key to the boardroom, Mr. Shenkman said, “The onus is on us as CFOs to ensure our relevance and that we have a permanent seat at the table.” The first step, he said, is to develop and cultivate a strong relationship with upper management. “You need to be a valued member of the senior executive team in order to reach your full potential as a CFO,” which is to provide insights and assist in decision making, he added.

He advised CFOs to think creatively and resist hanging on to their old ways that offer a sense of security. “I find a lot of finance people revert back to what their comfort level is, which is often, ‘I want to get back into my spreadsheet and find the right answer.’ ”

In an interview, Ms. Woo echoed this: “No longer is the day where you can just repeat what you learned from the past. Changes are everywhere, and companies rely on the CFO to step up the game and be anticipatory instead of just focusing on the past.”

Mr. Shenkman advised new and veteran CFOs alike to keep their “crunched numbers” accurate, embrace good processes that can be modified to the changing needs of the business, but also to focus on spending a portion of their time with customers and vendors. “This will go a long way toward proving to upper management that you’re not myopic about the business, and that you really do have a larger view of the organization, you do deserve a seat at the table, and that you can help influence decisions which you’re very likely in a good position to influence.”

Now, welcome to the new age.

The Road to Cybersecurity


As Seen in CFO Studio Magazine Q4 2016 Issue




Keeping an organization’s computer network safe from hackers used to be in the hands of the IT department, but as cyberterrorism becomes a bigger and bigger threat, more CFOs are shouldering a large part of the responsibility. According to Lynn Calhoun, CFO of BDO, USA, LLP, which provides assurance, tax, financial advisory, and consulting services: “This shift is due, quite simply, to the costs and risks involved in a cybersecurity breach.” While IT people certainly play a critical role in preventing and responding to such an attack, “the CFO—as well as others in the organization— is getting pulled into the discussion to balance costs, risk, and overall investment.”

Mr. Calhoun spoke on “Digital and Info Risk: Threats, Cost, and Opportunities for World-Class Companies” at a World-Class Companies CFO Dinner, part of CFO Studio’s Executive Dinner Series, held recently at Morton’s The Steakhouse in Chicago. CFOs from select Chicago-area companies attended the invitation-only dinner.

Mr. Calhoun began the evening’s discussion with this eye-opening observation: “Nobody really knows where the next threat is coming from.” He continued, “The sheer number of people out there spending volumes and volumes of time trying to figure out ways to hack into your system is far greater than the time you’ll ever have available to get into position to respond to those threats or prevent them from happening.”

He noted some of the typical, more common threats to cybersecurity, such as the ability to gain access to passwords, bank accounts, and credit card and social security numbers, but pointed out that today’s cyber terrorists are coming up with some unique and creative ways to solicit funds directly from an organization. “They have become quite adept at creating false emails that appear, on the surface, to be from someone of great authority in your company.” In most cases, the email is purportedly from the CEO, authorizing the CFO to make a payment to a particular entity with instructions to “get it done, and [you’ll] be filled in on all the details later.” Close inspection reveals such emails to be fakes, he said, but “they do look quite authentic to the untrained or very busy eye.”

An Ounce of Prevention

In an effort to stay a step ahead of the hackers, Mr. Calhoun said every organization must attempt to determine the source of real and perceived risk. “On a broad scale, you’ve got risk everywhere. But if you can narrow it down a bit, you’re more able to focus on what kind of breach in which sectors of the company will be most detrimental to your business.” This could be a direct attack where access to funds and resources has been acquired, he explained, or an indirect hit to reputation and brand.

While an organization can potentially guard against resource or monetary risks, it’s very difficult to do the same in the area of reputational risk. As an example, Mr. Calhoun cited the massive data breach at a large, national retailer about a year and a half ago, in which upwards of 110 million people had sensitive, personal information stolen or compromised during the holiday shopping rush. “Immediately, the public thinks the retailer isn’t protecting its data. That’s not necessarily grounded in the facts, and there’s no knowledge of what steps were taken before and after the attack, but all of a sudden their reputation is at risk of becoming tarnished.” All any company can do, he said, is “address the risks as best as possible to ensure that few, if any, breaches occur, and that damage to reputation is limited.” He added, “It’s a real challenge to balance the risks and the costs to prevent such occurrences.”

Jim Willard, an Executive for California-based Tidemark, a private-enterprise performance management company, and a CFO Studio Business Development Partner, found it thought-provoking that attendees seemed most concerned with the damage an attack could cause to their brand. “It almost outweighed the concern of the actual breach itself, and the impact on the data and the ensuing monetary consequences.”

Mr. Willard noted that “attendees seemed to feel they could effectively mitigate the risk of the tangible and monetary damages through their practices, procedures, and infrastructure improvements, but the open-ended risk of damage to brand is still out there.”

Mr. Calhoun questioned whether the public cares about cyberterrorism threats and attacks anymore, as there are so many instances of these in the news. He noted that even the media seems to have stopped focusing on the topic. “It’s become almost a way of life, and people, themselves, have had their individual systems hacked, so it’s possible we’ve become somewhat numb to it.” He said perhaps the risk of reputational harm is lower than before, just by “the pure numbing of the public.”

Up in the Air

The discussion really heated up when Mr. Calhoun questioned whether or not storing data in the cloud offers a greater or a reduced risk of cybersecurity attacks. “We were all unclear which was safer,” he recalled in a subsequent interview. Some attendees felt that the cloud environment might be the more secure option, because the third-party organizations providing cloud storage have a great deal invested in preventing attacks, as their future and livelihood depend on it. On the other hand, “Some of us, myself included, thought there was increased risk when your data resided somewhere other than where you can directly control it,” said Mr. Calhoun.

Scott Settersten, CFO of Ulta Beauty, a retailer of cosmetics and salon services, attended the dinner and said in an interview, “My perception always was that I’m more at risk if I keep my data in the cloud than if I keep it under my own lock and key, but that’s probably not the case because the people that are maintaining this data have better security than I’ll ever be able to afford, simply because that’s their core business.” (Settersten, the subject of an article that recently appeared in CFO Studio magazine, will lead a discussion at a CFO Studio Executive Dinner in Chicago later this year.)

Shiwali Varshney, CFO at Vosges Haut-Chocolat, a super-premium chocolate manufacturer and retailer, said that regardless of her uneasiness with cloud computing, “we have to go there eventually, because that’s where business processes are headed. Plus, it’s more cost effective to do so.” While she is confident that the companies providing the storage service are encrypting data and making every effort to ensure that data is secure, “I know there is inherent risk when data is stored in the cloud. But I know that if we want to be productive, we need to utilize the cloud-based solutions to be more collaborative and efficient.”

Ms. Varshney went on: “How we manage that risk, and how much money we spend managing it, is becoming crucial to understand. This is where my concern lies.” She also noted that “there has been a big change toward how we handle operational risk management and training. It’s shifting more toward cybersecurity training” with disaster training programs focusing on responding to data leaks. She called it a “sign of the times,” and added, “I want to invest in training people to move into this next millennium.”

Insuring Up

As the conversation continued, some in attendance revealed that they had purchased cybersecurity insurance. This is a relatively new marketplace, Mr. Calhoun noted, and “it’s really evolving for those selling it and those buying it, as both try to figure out what exactly they’re insuring and how much to charge and pay for it.”

He added that the idea of insurance coverage against cybersecurity threats is a pretty good one, given the uncertainty of it all, and because it is possible to identify how some costs relate directly to certain risks. “Whether it’s the cost of notifying individuals who may have been impacted, or the expense of taking additional steps within your networks to correct it and prevent it from happening again, there are indeed some areas where you’re better off having insurance coverage to protect yourself than not having it at all.”

As for the extent of that coverage, Mr. Calhoun advised companies to “lean toward buying more than you need, just because of the uncertainty of what’s really necessary.” Better to have more than you’ll ever need, he said, than to be caught with less.

Silver Linings

The increase in cybersecurity threats and attacks is providing an opportunity for organizations to take a good, long look at increasing their level of security, said Mr. Calhoun, “which is definitely a good thing.” And it happens to be a good time, he said, to “take a step back and examine, for example, access into your systems: Do you use password security and what do you do with that? What information do you actually store? Would it be better to not store some data on a permanent basis? Do you use firewalls or VPNs (virtual private networks)?”

These are all ways, he pointed out, to be more alert, attentive, and aware of security issues. “You may have looked at some of these items, like firewalls, for instance, as an inconvenience to personnel, or as an additional cost layer that you just don’t need. But when you start viewing them from a cybersecurity standpoint, those digital barriers become very good things to implement within your organization for all the right reasons.”

Mr. Calhoun said he hoped participants walked away with an appropriate level and balance of fear that may have gotten accentuated, based on what was discussed. “In addition, maybe a little clarity was gained around potential solutions that exist to address that fear, whether that be in the area of insurance coverage or a new way to look at cloud computing.”

Peg Koenigs, Senior Vice President and CFO at the Federal Reserve Bank of Chicago, said in an interview after the dinner that she believes a majority of companies across the globe are concerned with the ever-increasing threat of cyberterrorism. She added that it was interesting to see that “CFOs are taking an active role in this, and that it is clearly a new responsibility for CFOs across the board.”

Ms. Koenigs said she assumes that, universally, every organization is thinking about, experiencing, and making efforts to shore up cybersecurity, and some of this is happening in the office of the CFO. “It’s expected of all of us CFOs to protect the data. Certainly, it’s a risk we think about and it sure is part of my responsibilities.”

Mr. Calhoun closed the discussion by acknowledging that cyberterrorism is “one of those areas that tends to get pushed to the back burner as other issues take precedence and you get busy in your routine day-to-day.” He admits it’s easy to lose sight of it a little bit, but cautions that “it does need to be elevated within your organization to the appropriate level to get people’s attention.”

Copyright 2017