Interview with Howard Reba
Interviewer: Andrew Zezas, SIOR
Following is the transcript of a CFO Studio video between Andrew Zezas, CEO of New Jersey based Real Estate Strategies Corporation and Howard Reba, Senior Finance Leader and CFO.
Visit www.CFOstudio.com to read about this interview and to watch the entire video interview.
The Key to a Successful M&A Deal
Zezas: Hi, this is Andrew Zezas, your host at CFO Studio. I have the pleasure of sitting here today with Howard Reba. Mr. Reba is a senior finance leader and CFO. His background includes having been a problem-solver, and directing teams to maximize operational and financial performance. Howard is here to talk to us about the key to a successful M&A transaction. Howard, it’s great to have you here on CFO Studio, thanks for being with us.
Reba: Thank you very much Andy. It’s a pleasure to be here.
Zezas: Howard, today’s topic is the key to a successful M&A transaction. What is it? What’s the key?
Reba: Well Andy, in one regard it’s quite simple and quite complex at the same time. It all depends upon discipline, experience, and careful planning. But before we delve into that, a lot of people asked me why I’m even talking about M&A today. They don’t think there are any deals to be made out there today.
Zezas: Yeah, given the kind of funky economy we’ve come out of, some people are thinking M&As are a thing of the past.
Reba: Well, let me tell you, there are deals out there, and I think there are more deals to come. Credit markets are easing. A lot of companies are sitting on large sums of cash. I see private equity firms raising money again and doing acquisitions. Management teams now have the wherewithal to go out and look for bargains, do some opportunistic buying, and in short order I believe the strategic deals will follow.
Zezas: OK, so opportunistic deals, and strategic deals, is this something that’s going to happen two years from now? Three years from now?
Reba: It’s happening now, right now Andy.
Zezas: M&A is active.
Reba: Yes it is.
Zezas: So companies – some of them are active, and others are gearing up and ready to go.
Zezas: That’s very exciting!
Reba: Yes it is! Absolutely.
Zezas: So, let me take you back now. You started out by saying that the key to a successful M&A deal rests on three prongs: discipline, experience, and planning. Tell me more.
Reba: OK. Well let’s take a look at an M&A transaction. You have two parties – you have a seller, who either wants to, or needs to sell. And, you have a buyer who sees some value in adding this organization to his. They’ll come together on some loose terms around the potential agreement and execute a letter of intent. This kicks off what I consider to be the three phases of any M&A transaction. Namely: due diligence, execution, and integration.
Reba: These are discrete phases, but will overlap significantly in terms of timing.
Zezas: OK – three – due diligence, execution, and integration.
Zezas: OK, tell me about due diligence.
Reba: OK, due diligence is when the buyer gets an opportunity to really look under the hood and validate what it is he based his LOI (Letter of Intent) upon. Are the assets what they thought they would be? Liabilities? Are there sales forecasts? Are there expense issues, are there any operational concerns, who are the people, so forth and so on. Basically, once he has an understanding of what is actually there, he needs to do a very important second step that not everyone does. He needs to start picturing, at this point, what will this look like as part of his organization.
Zezas: So, during due diligence he’s got to vision what eventual execution and integration will actually look like.
Reba: Correct. Simultaneously with finding out what’s going on, he needs to figure out – does it fit? He needs to mock up financial statements, draw up an organizational chart, look at the customers: are they addictive or duplicative? So forth and so on.
Zezas: And, this is all during due diligence.
Reba: All during due diligence. Otherwise, you run the risk of doing the due diligence and finding out you’re not going to get what you want.
Zezas: Now that’s the buyer. Tell me about the seller.
Reba: The seller wants a deal. So, it is in the seller’s best interests to be candid and share the information. Tell the buyer what it is that he needs to know to make an informed decision.
Reba: Transparency, one hundred percent. Failure to do so could put the deal at risk. I was part of one transaction where I was the buyer, we were months into due diligence just about to close it out, and the seller calls me up and says “we have some pending litigation.”
Zezas: Wait, so you’re months into due diligence, and this was a “by the way”?
Reba: Yes this is what happened. It was infuriating. But worse than that, it made us skeptical of everything the seller had told us during the entire due diligence process. We almost walked away from the deal.
Zezas: So what did you do?
Reba: We did some extra due diligence, changed around some indemnification terms, and we were able to go ahead and proceed with the deal. But, not until much angst had been exhausted.
Zezas: I can imagine, I can imagine. And, as the finance executive on the deal, I’m sure you have led the charge in terms of how to make sure that everything was right.
Reba: Yes. The CFO is the quarterback of any transaction team. As you can tell there is a lot of work that needs to be done to make a deal successful. There’s going to be leaders, and experienced subject matter experts from every discipline in the organization: the seller disclosing information about it, the buyer understanding it, and delving deeper. They’ll be lawyers, maybe bankers and advisors involved, but it’s up to the quarterback to make sure everything stays on track and works in lock step.
Zezas: So we talked about due diligence, tell me about the culmination of due diligence – what’s next?
Reba: Execution. Assuming you find nothing during due diligence that causes you to walk away or you find something and you adjust the proposed terms of the deal, you’ll execute the merger agreement. It’s important that if you have any deal-breakers or any sacred cows that need to be addressed you don’t wait until due diligence is complete. You know, I was a part of a deal once where at the last minute the deal fell apart – this was very early in my career – the deal fell apart over disputes on the amount of compensation for the remaining executives.
Zezas: At the end of the deal? Wow.
Reba: At the very end. Hundreds of thousands of dollars went to waste.
Zezas: So did it explode? Did you put the deal together?
Reba: The deal fell apart, could not reconcile it.
Zezas: So what does an experienced M&A CFO do to avoid that?
Reba: Well, an experienced CFO knows what questions to ask early on. What are the hot buttons? Anyone can go on the internet and find a checklist of what you are supposed to do, but until you have actually lived it, understand it, you are not going to be able to avoid such pitfalls.
Zezas: This sounds like – M&A from the CFO’s perspective sounds like it’s not something that any ol’ CFO can do.
Reba: It’s really a combination of an art and a science, and a skill you only get by living it. You know, it’s not a textbook type discipline. CFOs today have a wide spectrum of responsibilities. They go from the scorekeeper, and transaction, control-oriented activities all the way up to the value-added business partner to the business. As companies look to grow today they can do it through investing in R&D, investing in its own organic growth, or acquisition. Acquisition is a key prong, a key lever that any CFO can pull and you want someone who can do that for you.
Zezas: OK, that makes perfect sense. So take me through part three – we’ve talked about discipline, we’ve talked about execution, how does the qualified CFO shine when it comes to integration?
Reba: Well, the only party involved in integration is the buyer. Everyone else has gone home, taken their money and run as it is. Basically, how to do integration depends upon why you did the deal. If you bought a complimentary business, you’re going to want to find economies of scale and synergies. If you bought a stand-alone new product, service, into the industry –
Zezas: Some kind of diverse approach.
Reba: Right. You don’t need to have this sitting side by side. Whatever you do, you have what had been two enterprises now need to operate as one. You need to follow sound, time-tested, change management principles. You need to communicate pervasively with everybody throughout the entire organization. You need to dedicate the proper leaders and subject matter experts to this. You need to look at not only people, process, and technologies – you know, the real tangible things – but some of the less tangible items: branding, work hours, culture, customer retention, so forth and so on.
Zezas: Real guts of the company.
Zezas: Howard, in the last ten or fifteen years, the role of the CFO has changed dramatically in every respect. This sounds like a highly specialized area of expertise and not something that every CFO is capable of. My experiences have been that the ability to lead a company through a successful M&A transaction really depends upon the CFO’s expertise and I think some CFOs are qualified for this, but many are not. Would you agree?
Reba: Well, I look at it this way Andy. A good CFO, a successful CFO, is the equivalent of the general practitioner in the medical profession. He needs to be familiar with everything, he needs to have certain core competencies, he needs to know when to bring in the experts, when to go to the cardiologist, so forth and so on. In days past, I think the M&A expert was the cardiologist, the outside person. But, with the way that businesses are evolving today, with all the opportunities out there, with everything a CFO needs to worry about, it needs to be a core strength of his – it is now a core competency.
Zezas: So, in order to complete an M&A deal, the CFO really needs to have done this a few times in order to do it the right way.
Reba: I think so, yes.
Zezas: OK, so we’re about out of time. I want to wrap up with you. Let me ask you the same I asked you when we started, and you can wrap up for our viewers. What is the key to a successful M&A transaction?
Reba: Like we said, it requires discipline, experience, and very careful planning. The extent to which you execute each one of those determines how successful you will be. A truly successful CFO knows how to use an M&A transaction as an opportunity, as a catalyst to transform the enterprise onto bigger and better things.
Zezas: He knows how to use M&A as a catalyst to transform the enterprise.
Zezas: That’s very impressive, that’s very impressive.
Reba: Thank you.
Zezas: Howard, listen, this has been great, I truly appreciate you visiting us – visiting with us here at CFO Studio and I hope you’ll come back and see us again.
Reba: Absolutely. Thank you, Andy.
Zezas: Thank you. This is Andrew Zezas, with Howard Reba, for CFO Studio. Thank you for watching.
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