Employees pass along a connecting walkway at the International Business Machines Corp. (IBM) Watson cognitive computing platform Internet of Things (IoT) center in Munich, Germany.
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IBM’s supercomputer Watson moves fast — fast enough these days to be on the job at tennis tournaments like the recent Wimbledon, where players are hitting balls at a top speed of more than 150 mph. The IBM AI cuts video highlights and pushes them out to social media at a rate humans can’t match. But Watson is not the only one at IBM whose role is demanding more speed as a component of winning.
“I spent years as CFO, and the job has changed dramatically from start to finish,” said IBM senior vice president of global markets Martin Schroeter at the recent CNBC @Work Human Capital + Finance conference in Chicago.
One crucial area of competition where the IBM executive said speed has become critical is an area more often associated with deliberate processes: mergers and acquisitions.
“We are acquisitive,” Schroeter said. IBM just completed its $34 billion acquisition of open-source software company Red Hat.
“In my time on the deal committee, for 12 to 13 years, we bought 150 companies,” he said. “But we, and I as CFO, lost when I did not move fast enough.”
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Schroeter said IBM historically has sent in multiple teams to conduct due diligence on deals, sometimes over a period that lasted weeks. That led to situations in which a rival “walks in the day after [our team] left and offers 15% more than we had just.”
IBM AI technology like Watson.is helping top executives make M&A decisions more quickly by analyzing risks, workflows, synergies and other factors.
“Instead of going in with 25 things we need to know, now it is only the two or three things that we need. We use AI and analytics to figure out what is critical, and due diligence can be in a few hours versus a few weeks. The world will continue to move that way,” Schroeter told attendees at the CNBC event.
Schroeter’s sentiment is not an outlier in the world of chief financial officers today.
“The speed at which we are operating now is so much faster, for me as a CFO, we need to analyze data much faster. For sure, I rely heavily on skills of team, but I need to lean in,” said Adobe CFO John Murphy at the CNBC event.
“Old-school CFOs focused on avoiding mistakes. The mindset does not work today. Play to win; don’t play to not lose,” said Jack McCullough, president of the CFO Leadership Council, in an interview with CNBC. “The pace of change is historically unprecedented.”
McCullough said even though data analytics helps, humans are still getting used to using the new tools in ways that increase speed of decision-making rather than reinforce old, conservative ways.
“There are incredible tools today to make data analysis easier and more accurate than ever before. That’s great, but more than a few CFOs have told me that their organizations now suffer from analysis paralysis. Once CFO told him that her board wanted to run 40 different scenarios for a potential acquisition. Forty! And, by the time they were ready to move, it was too late. Just because you can run 40 scenarios does not mean you should.”
If you ask what keeps me up at night, how you keep up with that change, and it is coming, whether you want it or not.
Paul Jacobson
Delta Air Lines CFO
The fact that deal analysis has a need for speed should not be taken to extremes. Both sellers and buyers want some deliberation to make sure pricing is right.
Ken Goldman, former CFO of Yahoo who now runs Eric Schmidt’s family office Hillspire, said it is true you cannot take “forever” to perform due diligence, but big deals are never going to be completed in hours. When he was involved in selling Yahoo to Verizon it was over a number of weeks and the deal was completed in a deliberate fashion.
“Anything that requires me to make a gut judgment call in hours or days, I do worry about someone trying to sell me something,” Goldman, who is a member of CNBC’s Technology Executive Council Advisory Board, said in an interview with CNBC. “You’ve got to do deals that strategically make sense and it does require a senior team to move relatively quickly, but … no one wants to sell without knowing best price.”
He did indicate that competition over deals is more intense. “In the fast-moving markets we are in today, being too deliberate is hard to do. It is not only strategic acquirers looking at deals but all the dollars the private equity firms have now, and corporate venture arms as well. … You can’t take forever.”
“PE firms are making their presence felt like never before,” McCullough said.
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Goldman said there is less risk, at least in terms of superficial appearances, in making M&A decisions today because of the historically low cost of capital with interest rates so low.
“If a company is acquired in cash, it is almost always accretive because of cheap capital today,” he said.
That may lead acquirers to move quickly, but not necessarily for the right reasons. He also noted that publicly traded stocks move with more volatility, so if an acquirer is paying less than 10% of market cap, it is easier to move on deals since stocks can move up and down that much in a short trading window.
The number that matters most
Certain numbers will be key in any deal and right now, Goldman says revenue is king.
“Lots of these deals get done on revenue. You can have lots of moving parts to make numbers work, but the key is revenue.” Goldman said using the Nasdaq as a barometer, many stocks show that revenue growth has an “almost exponential” impact on market valuation. “How much revenue can grow and how much you are paying for it are the questions. People are paying up for revenue growth.”
Still, Goldman said numbers are taking a back seat, even for CFOs.
“It is hard to do it purely on the numbers. Business judgment almost trumps the numbers,” Goldman said. “You need numbers to support the opinion and fairness of price, but you really need to make the decision on strategic grounds. … That will be way more critical and time sensitive than just pouring over due diligence and numbers.”
He said evaluating a deal is like “paying up for key talent and impact-performing roles.”
An acquisition like IBM’s Red Hat deal reflects the need to bring in young talent and for financial officers to think about M&A differently, McCullough said. “Through its acquisition of Red Hat, IBM now has access to some of the best young minds in the world. So, the CFO affects R&D and HR,” he said.
Delta Air Lines CFO Paul Jacobson says some of the CFO office processes of the past were unnecessary luxuries, and need to be permanently shelved.
“We used to burn an entire weekend to find an answer to a question you did not need to know the answer to. With data, and the agility to access it, the question is how do you get to a world where there are no more ad hoc reports? That is the world we want to get too,” Jacobson said at the CNBC @Work Human Capital + Finance event.
“The finance job will change dramatically. Half of finance jobs will be different in five years. It does not mean fewer jobs, it just means different ones. We are automating, not to have fewer people, but to have people do more analytical work and more deeply think about the business. If you ask what keeps me up at night, how you keep up with that change, and it is coming, whether you want it or not,” Jacobson said.
