This article was originally published on Forbes.com
Given the clouds that frequently gather over the self-driving car industry, you might have expected Analog Devices, Inc., CFO Prashanth Mahendra-Rajah to avoid any mention of ADI’s high-performance radar.
Why draw attention to a previous pivot away from a product line when the semiconductor giant can spend its days basking in the glow of its pending deal to acquire Maxim Integrated Products, Inc.? This marriage, which industry analysts frequently describe as “imminent,” is expected to turn ADI into a chip-making force with an enterprise value of about $68 billion.
Nevertheless, ADI’s past pivot appears to remain top-of-mind for ADI’s finance chief, even as he draws the attention of ADI’s employees, shareholders, and customers toward the future.
“We’re transitioning into a new era for the company, and what we are now beginning to message to the organization is around free cash flow,” begins Mahendra-Rajah, who entered the CFO office at ADI in 2017 after serving as CFO for WABCO Holdings and holding senior finance roles at Applied Materials and United Technologies Corp. (UTC).
“This is about ensuring that the organization has visibility into the drivers over which they have control and the ability to create operating leverage that will lift free cash flow to 40 percent and move us from a place in the top 10 percent of the S&P 500 to being in the top 5 percent in terms of free cash flow yield,” Mahendra-Rajah explains.
Or, to put it another way, the success of the Maxim deal will come down to ADI’s ability to “lift free cash flow”—a task that Mahendra-Rajah is confident that ADI can achieve in light of its intra-organizational visibility and the company’s adroitness when it comes to “messaging” and modifying organizational behaviors. .
Says Mahendra-Rajah: “Given how dynamic our industry is, agility in our decision-making is something that is critical to ADI.”
It’s this same agility in decision-making that finance leaders strive to achieve—but often struggle to expose to outside stakeholders—which prompted ADI’s finance chief to mention the previous radar retreat.
“A while back—I think maybe before the broader market—we began to get some visibility into the fact that the concept of a true self-driving car was likely to be further out than people had originally expected,” comments Mahendra-Rajah.
“Instead, consumer demand moved to electric cars, so we said that we were going to ramp down our spend on radar and significantly increase our investment in some of the elements that go into electric vehicles,” explains Mahendra-Rajah, who notes that the pivot to redeploy capital spending allowed ADI to eventually capture more than half of the top 10 manufacturers of electric vehicles (EVs) as its customers.
In the end, ADI’s radar blues were no match for its organizational agility, as Mahendra-Rajah explains when he declines to repeat the bulleted items found in press releases about how the Maxim deal will bring ADI “increased scale and diversification” and “enhanced domain expertise and breadth of engineering capabilities” in favor of better highlighting points that few press releases seldom address.
Says Mahendra-Rajah: “Are there policies from a company standpoint that are maybe creating some unintended behaviors? Finance is about connecting decisions that management makes—or sometimes decisions that management avoids—and translating them into the consequences to cash flow.”
Behind the translation resides a trusted organizational model, says ADI’s CFO.
“Today, I have finance leaders partnered with all of our P&L owners, and I do rely quite a bit on the UTC model of having two in a box, where finance leaders need to earn their right to be the right-hand partners of their general managers,” he says, while crediting United Technologies Corp. with influencing a key attribute of ADI’s organizational approach.
It was shortly after his arrival at ADI that Mahendra-Rajah began studying the behaviors within the organization that were putting the company’s maturing free cash flow ambitions at risk.
Not surprisingly, the new CFO’s attention was quickly drawn to ADI’s R&D costs—nearly 20 percent of annual sales—where the technology company was widely known as a big spender.
Says Mahendra-Rajah: “This creates our sort of ‘virtuous cycle’ of highly innovative products, which we then sell to a broad set of customers, who then reward us for them with industry-leading margins, which we then convert into very strong cash flow.”
However, turn back the clock, and not all ADI P&L managers have been correctly aligned with ADI’s virtuous cycle. In fact, the firm’s R&D spend apparently needed a new safety valve.
“When I started, we wanted to encourage the organization to prioritize how it spent these R&D dollars, so we introduced a very understandable concept called ‘flat opex,’” recalls Mahendra-Rajah.
As its name suggests, this framework kept annual R&D spending flat and required business managers to reallocate their R&D funds if they felt that new spending would be needed.
Recalling some of the pushback that flat opex received from ADI managers, Mahendra-Rajah summons his response at the time: “’This does not mean that we don’t want to hear your great ideas. It does mean that when you bring forth these great ideas about where you want to invest for new products, we also want to hear about what are you going to stop doing in order to fund this.’ So, we created this loop of accountability.”
Still, with a transformative deal largely expected to close in the near future, we prodded ADI’s CFO to share how finance will work to protect and energize the virtuous cycle in the coming months.
Replies Mahendra-Rajah: “Ideally, in the next 60 days, we will be closing on the $20 billion-plus acquisition of Maxim. The priority for our finance team is to integrate this company into ADI in such a way that we’re able to report our consolidated results on Day 1. We will build the road map to deliver the synergies that we promised to our shareholders and support the organization as we map out the strategy of how to take this new enterprise—which will be approaching $9 billion in revenue—and drive it so that we can become a $100 billion-plus market cap company in the next 12 to 18 months.” – Jack Sweeney