Management & Controlling; Entrepreneurship & Innovation

How CFOs Can Prevent Your Company from Overpaying during M&As

Three attributes can make a CFO perform significantly better during acquisitions

Professor Ayse Karaevli and Professor Serden Özcan of WHU – Otto Beisheim School of Management examined 1,983 corporate acquisitions in the United States and have come to some interesting conclusions. When chief financial officers (CFOs) have greater influence in the C-suite, companies are far less likely to overpay during acquisition deals—thereby avoiding the trap of diminishing the potential added value.

CFOs with a high degree of influence in their company’s boardroom possess generalist skills, enjoy elevated status in the organization, and are able to demonstrate independence from the CEO. The CFO independence is particularly important, as companies paid, on average, premiums 18% lower than those of their contemporaries.

Nevertheless, today’s CFOs often lack access to these three aforementioned sources of informal power that elevate their boardroom influence on strategic M&A (merger and acquisitions) decisions: Around 40% of corporate CFOs have specialist skills; less than 40% of CFOs are independent; and CFO compensation (a proxy for relative CFO status vis-à-vis the CEO) is less than 40% of that of the CEO. This indicates an opportunity for boards to shift those dynamics.

The original study was published in Massachusetts Institute of Technology (MIT) Sloan Management Review, Summer 2022. To read the full article and more details of the study’s results, please click here.

Tips for practitioners
  • When hiring a CFO for your company, look for somebody who is a generalist and not a mere financial expert! CFOs who have previously worked in other functions, divisions or at other companies/industries will possess a much broader understanding of corporate strategy as a whole and be able to offer fresh perspectives.
  • Do not let the CEO alone appoint the CFO; the entire board should be included in the decision-making process! A high degree of independence allows the CFO to have a more critical perspective on the acquisition being pursued. That CFO can act as a counterweight to the CEO in important strategic decisions.
  • Give your CFO elevated social status within your company. A high standing will give the CFO more influence and clout. It will also give them the confidence to point out any risks associated with an M&A deal.
Literature reference
Authors

Professor Ayse Karaevli

Ayse Karaevli is a Professor and Chair of Corporate Management and Change at WHU – Otto Beisheim School of Management. She holds a Doctor of Business Administration from Boston University and completed her post-doctoral studies at the Kellogg School of Management at Northwestern University. Professor Karaevli’s expertise is in the broad area of strategy, and she focuses on strategic and organizational change, CEO successions, top management teams, and executive power and executive careers.

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Professor Serden Özcan

Serden Özcan is the Otto Beisheim Endowed Chairholder of Innovation and Corporate Transformation at WHU – Otto Beisheim School of Management. As an expert on start-ups, entrepreneurial finance, private equity, activist shareholders, corporate entrepreneurship, and corporate transformation, Professor Ozcan has received multiple international research awards, and his work has been published in some of today’s most prominent academic journals. He is also the founding director of the annual WHU Campus for Corporate Transformation event, where C-suite members from Europe’s largest companies share their personal and professional observations on corporate transformation.

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