Date of publication: 2017-08-31 16:28
Expansionist deals are more likely to have a clear investment thesis, while "transformative" deals often have no credible rationale.
The market is likely to reward the former and punish the latter.
The dilution/accretion debate. One more side discussion that comes to bear on the investment thesis: Deal making is often driven by what we'll call the dilution/accretion debate. We will argue that this debate must be taken into account as you develop your investment thesis, but your thesis making should not be driven by this debate.
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In conclusion, the ideal private equity CFO thinks like an owner, bringing entrepreneurial gumption, a hands-on approach, and a clear and timely communication style. He or she knows “what good looks like,” in the contexts of both a best-in-class finance organization and delivering value through a successful exit.
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In private equity-backed companies, the CFO is often viewed as the conduit of information to the financial sponsor — communicating financial results, working through capital structure issues or M& A opportunities, and generally speaking the parties’ common language of finance. Therefore, private equity firms tend to be quite influential in the CFO selection process, even though the ultimate decision typically resides with the portfolio-company CEO.
Highly regulated industries, such as financial services and health care, often require a CFO with knowledge of sector-specific regulatory nuances. In a world driven by internal rate of return , time is always of the essence, so the ability for an incoming CFO to get up to speed quickly is critical.
The ideal private equity CFO is both strategic and operational, serving as a thought partner across various functional and divisional aspects of the business while implementing the systems and processes to help the company get to an exit.
First among these is performance orientation, which is, not coincidentally, one of the central business priorities of private equity investors. This competency is characterized by a high sense of urgency, a bias for rapid change and continuous improvement, and a strenuous avoidance of negative surprises. From a financial perspective, the CFO’s performance orientation manifests itself as a track record of consistently delivering significant year-over-year improvements in financial results.
Unfortunately, dilution is a problem that has to be wrestled with on a regular basis. As Mike Bertasso, the head of H. J. Heinz's Asia-Pacific businesses, told us, "If a business is accretive, it is probably low-growth and cheap for a reason. If it is dilutive, it's probably high-growth and attractive, and we can't afford it."67 Even if you can't afford them, steering clear of dilutive deals seems sensible enough, on the face of it. Why would a company's leaders ever knowingly take steps that would decrease their EPS?
66. Todd Thomson, speaking on "Strategic M& A in an Opportunistic Environment." (Presentation at Bain & Company's Getting Back to Offense conference, New York City, 75 June 7557.)
Finally, companies sometimes look for CFOs who understand certain operating characteristics of the business without necessarily coming from the industry. For example, a consumer manufacturing business that is struggling with supply chain issues may look to hire an industrial CFO who understands plant operations and vertical manufacturing, irrespective of consumer products experience.
Moreover, bringing a CFO from outside the industry may bring a certain level of objectivity and freshness that can be helpful in thinking about different ways of operating the business.
Clear Channel's expansion into outdoor advertising leverages the company's core competencies in two ways: First, the local market sales force that is already in place to sell radio ads can now sell outdoor ads to many of the same buyers, and Clear Channel is uniquely positioned to sell both local and national advertisements. Second, similar to the radio industry twenty years ago, the outdoor advertising industry is fragmented and undercapitalized. Clear Channel has the capital needed to "roll up" a significant fraction of this industry, as well as the cash flow and management systems needed to reduce operating expenses across a consolidated business.