Why Some CFOs Make Better M&A Deals

When chief financial officers have greater influence in the C-suite, companies are far less likely to destroy value by overpaying for acquisitions.

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Despite the tremendous uncertainty and disruption caused by the persistent COVID-19 pandemic, global M&A volume exceeded $5 trillion for the first time in 2021, with many experts predicting that this current wave is only the beginning of a merger frenzy that could last for several years.1 The abundance of capital and the ever-increasing pressures to grow more quickly, become larger, and digitalize are driving companies to close deals with over-the-top premiums.

Overpriced acquisitions are hardly a new phenomenon: In the past two decades, U.S. public companies have paid, on average, a 36% premium in excess of the prevailing market value of the target company prior to the news of the takeover. But in the current hot market for acquisitions, the risk of overpayment is significantly heightened — and, according to our research, that’s a risk organizations might be able to mitigate by examining and changing power dynamics in the C-suite.

Numerous empirical studies have identified behavioral biases and misalignment between managerial and organizational interests as the main reasons companies overpay for acquisitions.

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References

1. N. Nishant, “Global M&A Volumes Hit Record High in 2021, Breach $5 Trillion for First Time,” Reuters, Dec. 31, 2021, www.reuters.com.

2. A. Afsharipour, “Reevaluating Shareholder Voting Rights in M&A Transactions,” Oklahoma Law Review 70, no. 1 (2017): 127-158.

3. S. Pavićević and T. Keil, “The Role of Procedural Rationality in Debiasing Acquisition Decisions of Overconfident CEOs,” Strategic Management Journal 42, no. 9 (September 2021): 1696-1715.

4. S.P. Ferris and S. Sainani, “Do CFOs Matter? Evidence From the M&A Process,” Journal of Corporate Finance 67 (April 2021): 1-66. The study found that more influential CFOs positively affect M&A quality. The researchers’ principal component analysis suggests that the “formal” sources of power for CFOs contributed most to the CFOs’ influence in the U.K.

5. For academic literature on the individual consequences of the breadth of executive experiences, see A. Karaevli and D.T. Hall, “How Career Variety Promotes the Adaptability of Managers: A Theoretical Model,” Journal of Vocational Behavior 69, no. 3 (August 2006): 359-373.

6. C. Holley, “The Journey to CFO: Charles Holley, CFO-in-Residence,” Deloitte, July 23, 2018, https://deloitte.wsj.com.

7. S. Estrada, “Estée Lauder’s CFO Talks Growth,” Fortune, Sept. 23, 2021, https://fortune.com.

8. W. Shi, Y. Zhang, and R.E. Hoskisson, “Examination of CEO-CFO Social Interaction Through Language Style Matching: Outcomes for the CFO and the Organization,” Academy of Management Journal 62, no. 2 (April 2019): 383-414.

9. S.S. Dikolli, J.C. Heater, W.J. Mayew, et al., “Chief Financial Officer Co-Option and Chief Executive Officer Compensation,” Management Science 67, no. 3 (March 2021): 1939-1955.

10. C. Holley, “Steering M&A From the CFO’s Seat,” Deloitte, Jan. 29, 2018, https://deloitte.wsj.com.

11. J.M. Peiro and J.L. Lekia, “Formal and Informal Interpersonal Power in Organisations: Testing a Bifactorial Model of Power in Role-Sets,” Applied Psychology: An International Review 52, no. 1 (January 2003): 14-35.

12. J. Seo, D.L. Gamache, C.E. Devers, et al., “The Role of CEO Relative Standing in Acquisition Behavior and CEO Pay,” Strategic Management Journal 36, no. 12 (December 2015): 1877-1894.

13. Holley, “Steering M&A.”

14. C. Clifford, “The CEO and CFO of Pepsi Open Up About When and How They Fight,” CNBC, Oct. 28, 2016, www.cnbc.com.

15. M. Rosoff, “HP Finance Chief Tried to Stop $11.7 Billion Acquisition, but Lost,” Business Insider, May 8, 2012, www.businessinsider.com.

16. J. Browning, “Ex-HP CFO Expected to Be Fired for Objecting to Autonomy Deal,” Bloomberg, June 10, 2019, www.bloomberg.com.

17. Clifford, “The CEO and CFO of Pepsi.”

18. Shi, Zhang, and Hoskisson, “Examination of CEO-CFO Social Interaction.”

19. Seo et al., “The Role of CEO Relative Standing.”

20. Holley, “Steering M&A.”

i. S. Finkelstein, “Power in Top Management Teams: Dimensions, Measurement, and Validation,” Academy of Management Journal 35, no. 3 (August 1992): 505-538.

ii. S. Datta and M. Iskandar-Datta, “Upper-Echelon Executive Human Capital and Compensation: Generalist vs. Specialist Skills,” Strategic Management Journal 35, no. 12 (December 2014): 1853-1866; Dikolli et al., “Chief Financial Officer Co-Option”; and Seo et al., “The Role of CEO Relative Standing.”

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