Navigating M&A Success: The Evolution of the CFO Role in Engineering

The role of a CFO has evolved beyond debits and credits, with data analysis becoming increasingly crucial for informed decision-making. Successful CFOs are characterized not only by their financial acumen but also by their curiosity; those who have an insatiable drive to ask questions, seek new insights, and drive growth. Curiosity is essential for CFOs, and one of the critical tasks this financial leader must handle is mergers and acquisitions (M&A). The CFO is crucial to a successful deal, whether it's target valuation, identification of financial synergies, or post-transaction integration.

In the fast-paced world of Architecture, Engineering, and Construction (AEC) firms, M&A has become increasingly common. These strategic moves can provide numerous benefits, such as expanding market share, diversifying services, and increasing competitiveness. However, it's only been in the last 10 years, with private equity finding successful investments in the space, that the overall activity has taken off.

Ken Hodgkins, CPA, has always been very curious, and his curiosity has helped him adapt to new environments and trends throughout his career. "Being curious is a fundamental learning skill. I'm reminded of how important it is every day when I have conversations with my 5 and 6-year-olds. I must hear 'Why?' a hundred times daily from each of them. In the workplace, I think curiosity has helped me because I always want to ask why and find out, or look for the next best answer, which is an asset in any leadership role, particularly the CFO role," says Ken.

Ken's curiosity has certainly paid off. The recently appointed Chief Financial Officer of the leading material testing and engineering company in western Canada has achieved a lot in his 20+ year career. Prior to this recent appointment, Ken has also held financial leadership positions at companies outside of the engineering space such as Allstate (NYSE:ALL) Insurance, National Express, and Baxter (NYSE:BAX) Healthcare.

But it was in the engineering space where Ken really found his passion and success. During his six years in the industry, Ken has led all aspects of finance from FP&A, corporate controller, all the way to CFO. Ken's career plan wasn't always in finance. "After finishing business school, I was actually lucky enough to play basketball briefly overseas. But my real career began once I returned and started working as a management consultant."

His time spent in management consulting laid the foundation for his future success as a CFO. "One of the really great things about consulting is that it's engineered to prepare you for adaptations that are required of the CFO role. The skills learned are especially valuable for a role in an engineering firm that requires you to quickly learn about a business and industry so that you can advise on the business's financial statements. My training allowed me to quickly get comfortable with different types of business models," Ken explained. After being poached by a client, Ken began his formal entry into the world of corporate finance.

Growth in all businesses can be accelerated by a clear acquisition strategy. In engineering companies, it is now almost the preferred method. Ken continued, "I've been involved in 5-6 acquisitions during the course of my career and countless assessments of potential opportunities. The AEC industry has been going through a boom of activity over the last few years, and it hasn't really slowed down. More recently, private equity firms have started acquiring firms, and it's challenging to compete with their deep pockets. Everything we're seeing suggests that activity is going to continue. Now that there is a bit of certainty about where interest rates are headed, we're seeing a lot of optimism on both the buyer and seller sides. I would expect we'll see a bit of a pick-up."

It's easy for a company to buy something from another company, but the real integration happens on day one after the acquisition closes. Not all transactions are successful. Ken shared two stories of integration failures with common themes. "Cultures that aren't aligned are the biggest causes of failures in my opinion. I've lived through two in the last five years."

The most recent involved the acquisition of a small engineering firm just after COVID. Personality red flags started to pop up during due diligence meetings with the president of the firm being acquired. However, each time these flags were ignored. Twelve months post-acquisition, the former president was exited from the firm. The damage done from the culture clash lingered, and the desired benefits from the acquisition never materialized.

The second integration failure involved an international UK acquisition. "Once again, culture differences played a large role," Ken shared. The acquisition was an attempt to enter a new market, but failures in due diligence regarding culture fit ultimately led to a failed integration.

The modern CFO role transcends traditional financial responsibilities, necessitating a blend of financial acumen and insatiable curiosity. Ken Hodgkins' journey exemplifies the value of curiosity in navigating diverse industries, particularly in the dynamic realm of engineering. As M&A activity in the engineering space surges, CFOs like Ken play a pivotal role in driving successful deals and post-transaction integration. Embracing curiosity, standardizing processes, prioritizing cultural compatibility, and committing to continuous learning are imperative for finance professionals aspiring to executive roles. Ken's insights underscore the importance of adaptability, hard work, and strategic vision in shaping a successful career path in finance.