Back on the M&A Trail

Eastman Chemical, which saw 2011 revenue and earnings increase by 23% and 18%, respectively, in January announced the acquisition of Solutia, a fellow manufacturer of specialty chemicals and performance materials. CFO Curt Espeland, who joined the Kingsport, Tenn.-based company in 1996 and has been its finance chief since 2008, helped steer the capital-intensive chemicals and specialty plastics provider through the financial crisis and through recent initiatives, such as the divestiture of its PET (polyethylene terephthalate) business, its acquisition of Genovique Specialties Corp. and its joint venture in Korea. Espeland, one of Treasury & Risk's CFOs to Watch in 2011, explains Eastman's approach to major initiatives, including M&A, and how the company incorporates benchmarking to optimize the results.

T&R: What key factors does Eastman analyze when deciding whether to pursue initiatives such as the Solutia acquisition?

Espeland: It starts with Eastman having a position of strength. In the world of finance, that means good cash flow management. What allows us to get into a position of strength is not only the underlying strength of our businesses but the strength of the balance sheet. When we looked at the opportunity to grow and align with Solutia, we talked about growing in the core businesses and leaning more toward the emerging markets, but we've always said it must be a good financial deal as well.

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T&R: What constitutes a good financial deal?

Espeland: First is earnings. We've strived for accretion in the first year following the acquisition, so we're looking for good earnings out of the gate. Second is cash flow. In the case of Solutia, both companies have very strong cash flows, and that's allowed us to leverage our balance sheets into attractive financial rates. We've talked about generating free cash flow of $1 billion over the next few years, after deducting capital projects and dividends. The third dimension is the return on invested capital. In a transaction like Solutia, we're looking for a return of 3% to 5% above the cost of capital. Whether it's organic growth or growth through acquisition, we tend to fall back on those three parts.

T&R: Eastman employs benchmarking across a range of its activities to develop best practices. Does that include acquisitions?

Espeland: When I took over as CFO in 2008, our growth strategy had been more organic and we explicitly said that joint ventures and M&A are going to be ways to execute our growth. So our finance and strategy teams used benchmarking to find best practices for integrating acquisitions. Part of it is talking to people who have done acquisitions. They don't have to be in the same industry; it's asking people to share best practices. Secondly, we talk to companies that specialize in providing integration support work and get their best ideas. In the case of Solutia, we would probably consider engaging such a firm.

As we've done with other acquisitions, we've benchmarked our due diligence process with a couple of other folks to get a sense of whether we're doing it properly. I see benchmarking and pursuit of best practices as a way to gauge capabilities and accelerate initiatives.

T&R: In what new ways is Eastman applying benchmarking?

Espeland: One area of focus now is to improve planning and forecasting. The annual business planning process touches on a lot of areas of the company, so we want efficient ways to collect that data and information. It's a process of both automating the inputs and building collaboration around what the inputs are telling us. It starts with the sales and operating plans—you want good alignment between those two—and translates those into sales and forecasting. We're also focused on building new capabilities, and for the finance professionals that includes more than number skills but also analytical and interpersonal skills. Number skills are not enough.