Boosting the Usefulness of M&A Forecasting

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Focus on the quality of your forecasts rather than the accuracy.

As most corporate finance execs know, the value of many merger and acquisition transactions can run into seven, eight or nine figures. Indeed, a recent Thomson Reuters report, "Mergers & Acquisitions Review," found that worldwide M&A totaled $542.8 billion in the first quarter of 2013. Deals of more than $5 billion accounting for nearly one-third of that sum.

Despite the often enormous sums companies dedicate to M&A, a surprisingly large number of CFOs are less-than-confident in the information provided by the financial forecasts their teams develop to support their M&A decisions. In fact, just one-quarter of executives are very confident in their forecasts' accuracy, according to Deloitte's fourth annual Corporate Development Survey. About two-thirds are somewhat confident; eight percent are not confident. In addition, 43 percent said they could identify no discernible pattern of accuracy in their forecasts.

Chris Ruggeri, principal with Deloitte Financial Advisory Services LLP and a leader in the firm's M&A practice, points out the potential risks of off-target M&A projections: "At a minimum, you can get flawed business decisions," she says. In extreme cases, you can have business disruptions." Moreover, the finger-pointing that can ensue when forecasts fail to provide a reasonable projection of potential results can corrode the company's culture. Ultimately, that can erode value, she adds.

Several missteps can lead to suboptimal forecasts, Ruggeri notes. One is failing to take the time upfront to "understand the critical dynamics." Instead, finance teams sometimes move right to the spreadsheets.

Instead, the stakeholders involved should be identifying the factors associated with the transaction that are likely to create value or contribute to risk. Ruggeri provides an example: say an energy company is considering an investment in additional production facilities in order to drive top line growth. The evaluation should include, among other factors, an analysis of the impact of changes in competitors' volumes on commodity prices. "Stop and frame the business decision the forecast is going to underpin," Ruggeri says. That allows you to measure the possible risk and value creation under different business conditions.

In the report, Charles Alsdorf, director with Deloitte Financial Advisory Services LLP compares the forecasting process to a football game: "Coaches do not spend time predicting the final score. Instead, they develop a thoughtful game plan that accentuates the strengths of their team, compensates for weaknesses, makes sure their players are prepared, sizes up the competition, and pays attention to game day field conditions."

As Alsdorf suggests, it's often tempting to focus on the accuracy of a forecast. That can be misguided, Ruggeri says, noting that nobody truly can predict the future. Instead, the focus should be on quality: are the assumptions underlying the forecast solid, and does the forecast provide insight into deal terms and value realization?

Another potential error: delegating the process to junior-level employees, with more experienced, senior staffers coming in only at the end. To be sure, it may be appropriate that some of the number crunching is handled by more junior employees. "You can delegate, but it's the informed judgment of senior people that makes all the difference," Ruggeri says. The process has to incorporate "the experience required to interpret and apply results in making business decisions."

One interesting finding from the survey: one-third of respondents report using social media in their M&A decisions. The top applications: target identification and due diligence. At the same time, respondents identified several impediments to the use social media in this context, including concerns about confidentiality and information reliability.

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Karen Kroll supplies the Business Finance community with reporting and commentary examining cash management and treasury-related topics.

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