Operational and Financial Considerations to Maximize Deal Value

It came out of nowhere: a triple whammy of a global pandemic, depressed oil prices, and a devastating supply glut.

In response, the oil and gas industry has taken bold action, reducing capital spend, cutting production, right sizing operating costs, and adjusting operating models. Despite these actions, there has been a record number of restructurings as companies contend with challenges accessing new capital and servicing debt burdens. Without a dramatic and unexpected upward market shift, this number will only rise.

Faced with continued market and operational challenges, several key questions remain: Will the bid-ask spread tighten and will mergers and acquisitions (M&A) activity accelerate in Q4 and early 2021? The simple answer is: it depends. Regardless, companies will likely take more drastic action to rebalance portfolios, create scale, and improve their ability to access capital—all of which point to increased M&A volume. In anticipation, companies should take into account several operational and financial considerations as they look to maximize deal value.

Operational Considerations

By focusing on five key operational areas, companies will be well positioned to appropriately manage integration activities, achieve scale, and successfully capture synergies.

  • Synergy Evaluation and Tracking
    • Initiating synergy evaluation and tracking early in the deal lifecycle is essential to setting the foundation for maximizing deal value. Utilize peer benchmarks to understand opportunity areas and assign targets to appropriate functional ownership. Make synergy tracking and variance analysis a regular part of the integration management cadence to drive accountability.
  • Integration Management Office
    • Proper integration management drives coordination and accountability.  The integration management office (IMO) should be led by a dedicated resource and include proper functional representation. Look for a turn-key solution to manage the overall integration including methodology, processes, tools, templates, and best practices.
  • Creating Scale and Cost Optimization
    • The success of the deal is often judged by the ability to create scale and optimize cost beyond day one readiness. Define the combined companies’ operating model and solve for the optimized organization structure, delivery model, processes, and technology landscape. Prioritize optimization opportunities to accelerate synergy capture.
  • Transition Services Agreement
    • A transition services agreement (TSA) can accelerate the negotiation and financial close by allowing the deal to move forward without waiting for the buyer to assume responsibility for critical services. But setting up effective TSAs can be a complex and time-consuming task. Develop a robust TSA exit strategy and do not delay critical decisions about the overall integration strategy and how you expect to create scale and optimize cost after day one.  
  • Cross-functional Coordination
    • Integration and synergy teams should include leaders with the requisite functional and operational knowledge to understand all the moving parts required to drive a successful integration. Leaders should be empowered to own initiatives specific to their functional area and offered incentives tied to achieving synergies and a successful integration.

Financial Considerations

By focusing on four key financial areas, companies will be well positioned to appropriately manage their data quality and timeliness, financial reporting preparedness, and priority alignment to ensure success in the M&A window.

  • Financial Reporting Preparedness
    • Financial reporting is often considered a less valuable component of a merger, acquisition, or capital raising transaction, but often drives deal delay and can result in missing the deal window altogether. Correcting this disparity is simple to understand but difficult to implement, particularly in deals with decentralized components and global operations. Getting a company’s financial reporting house in order early can help ensure readiness when the market window opens.
  • Quality and Speed of Financial Data
    • Reliable, disaggregated, and timely financial information is the baseline for how oil and gas sponsors determine and communicate value. Often, this data is generated too slowly, broadly, and manually, and is prone to human error, which can force inaccuracies and confusion. Oil and gas companies can improve accuracy by striking the right balance between investments in systems, processes, and people in the right places in the finance organization to avoid pitfalls during the M&A process.
  • Priority Alignment
    • Rarely do two management teams see the world the same way from a financial reporting and back-office perspective. Often, legacy critical-path items need to be adjusted to compromise on combined company priorities. Establishing a transparent finance organizational structure with financial reporting and back-office priorities is critical to M&A success.
  • Change Readiness
    • Most oil and gas companies establish their finance organization fit for one purpose—their current reporting obligations. It is often challenging and costly to change course at the last minute based on market fluctuations and deal dynamics without proper lead time. Establishing a flexible framework to allow the finance organization to pivot quickly depending on the deal decision is critical to success.

In normal circumstances, managing M&A integration can be a challenging endeavor; during a pandemic, it can be even more difficult. Companies can maximize the value of a prospective deal by focusing on these operational and financial imperatives that will ultimately reveal further opportunities for value creation and properly link the deal thesis with tactical execution.

James Lee is an executive managing director at Riveron, where Greg Carlson and Zac McGinnis are managing directors.

For more information, visit: https://riveron.com/industries/energy/.