When you’ve checked and confirmed that your CEO candidate is well versed, financially, to handle driving the organic growth of your organization, the next skill set that you need to check for in your executive search is whether the candidate possesses M&A skills – if growing by acquisition is part of the vision for the company. You will need a CEO who understands the life cycle of an M&A, one who has led M&A activities and divested non-performing businesses.
To start take a closer look at the M&A strategy itself: Does your candidate adhere to a regimented investment thesis and acquisition strategy that grafts onto the larger vision for the group, or are they whimsically reviewing market opportunities as they arise? Did your candidate develop the M&A strategy or are they amalgamating some flotsam and jetsam collection of pre-cooked deals from a variety of investment bankers and consultants?
In many cases, the CEO is being pitched “pre-cooked” deals which have already been subjugated to all the calculations and evaluations of a slew of M&A consultants. Therefore, the CEO is doing virtually nothing on the origination side except meeting with investment bankers, having coffee, and holding a dossier in their hand. More competent CEOs will drive and originate their own deals, which are in line with the value position the leadership team and shareholders want to build for the business. Having a clear M&A strategy and direction can be one touch point of your CEO’s competency in this area.
Next, look at our CEOs’ evaluation capabilities. At the foundation stone of this skill set is your CEO’s ability to understand the cost of capital (WACC), discount rates, risk premiums, and evaluation frameworks. This can be tested firstly on internal activities such as CapEx investments, investing $10 million USD back into the group they are leading, for instance. Ask them questions such as “Give me 2 examples where you have been instrumental in allocating capital to your company’s priorities? How did you do it?”. Highly competent CEOs will use a different weighted average cost of capital (WACC) for each business and a less competent CEO will use the WACC the bank or consultant provided and use on all the companies, and subsidiaries, in the group.
Can your candidate become a CEO who champions the company’s ability to invest for growth, such as acquiring a competitor or a complementary business? At other times, this can mean divesting legacy businesses and understanding what to focus on, and how to maximize the exit value of your assets. All decisions that catapult your growth rate into stratospheric levels are financial by nature, so the CEO should be able to challenge the CFO or financial consultants on the deal table when the company is making offers and negotiating sale prices. Useful questions to ask here are: “Give me an example of a time where you realized that capital was used ineffectively in your group? What did you do about it?” and “What is your WACC? How did you calculate it? How did you come up with the discount rate?”
Thirdly, and in connection with the previous point, when you’re in the market to buy and sell companies, your CEO has to be familiar with different evaluation techniques. You will want to see evidence of the CEO’s ability to understand assumptions in evaluations, where they are vulnerable, and how to build a case to reduce the other party’s evaluation. In a situation where you acquire a company with different facilities, some being in different cities or countries, some with old and antiquated technology, and others new with modern technology, you are in a situation where these subsidiaries have different risk profiles and different costs of capital.
When the CEO looks at this landscape, they need to be able to view the differences mentioned above and apply different risk profiles, discount rates, and capital costs to ensure that none of them is being smoothed over or is over-evaluated. They must possess the ability to challenge the bankers, consultants, CFOs, CIOs, and other financial experts who will be trying to dominate the deal table. Your CEO candidate must be able to disarm these financial hounds and beat them back to discount their positions and ensure the company is getting the best possible purchase price for the asset.
Ask your candidate the following questions: “Describe the different evaluation techniques that you would use while acquiring a business? Would you use a “net asset value”, “comparable company analysis”, “precedent transaction analysis” or “discount cash flow”? Describe when and where each one would be more appropriate than the other?” and “Describe the time you were working on an acquisition and felt the evaluation had to be redone to account for the different risk profiles of each of the subsidiaries?”
Remember, you want your CEO to be financially savvy and a formidable sparing opponent for financial advisors, and the last thing you need is a candidate who needs to be hand-held by the company’s CFO.
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