Photo of Uta Kemmerich-Keil, Executive Vice President, Corporate Finance and Jörg Bermüller of Merck KGaA.

This year’s coveted Top Treasury Team award goes to the Treasury Team at Merck KGaA, which is led by Rando Bruns, Head of Treasury and is part of the Corporate Finance organisation, led by Uta Kemmerich-Keil. Jörg Bermüller, Head of Cash and Risk Management, and Tim Nielsen, Head of Capital Markets, played an important role for the successful delivery of a number of key projects which effectively represent their collective achievements across no fewer than seven individual award categories.

• Merck Serono:

  Prescription drugs of chemical and biotechnological origin; focus on highly specialised therapeutic areas such as neurodegenerative diseases, oncology, fertility, endocrinology and rheumatology.

• Consumer Health Care:

  Over-the-counter products for preventive health care and self-treatment of minor ailments.

• Merck Millipore:

  • Bioscience

    – Products used by specialised life science laboratories.

  • Lab Solutions

    – Lab products and equipment for applications in life science and industrial markets.

  • Process Solutions

    – Products used in the production of pharmaceutical and biopharmaceutical drugs.

• Performance Materials:

  High-tech chemicals and materials for liquid crystal displays; lightning and display technologies; effect pigments for the plastics, printing and coatings industries.

Since confidentiality was important only three people at Merck Treasury were involved in the financing of the transaction. Merck also needed to identify high-class banking partners that were not conflicted, assuring confidentiality at the same time. It was key to work very fast so Merck started negotiations with banks as soon as practicable with the same set of lawyers, on the corporate side as well as bank side, that were already involved in the previous larger financing transaction.

For the banking partners it was necessary to have the refinancing in place very soon after signing the bridge loan, so in parallel to loan negotiations Merck worked on the update of the Debt Issuance Programme. Very soon after signing the acquisition Merck issued the largest euro corporate bond transaction in 2010 by issuing €3.2 billion. Tim Nielsen explains “the bonds were issued at favourable conditions for Merck, but were also attractive for investors, as evidenced by a rapidly filled order book. Special features of the transaction were a quite unusual tranche of two years and a contingent call at 101 if the transaction did not go through.”

Funds from the bonds enabled Merck to reduce the bridge loan to an amount of €1 billion. The syndication of the bridge loan was done by Merck itself in bi-lateral meetings with its relationship banks. Relationship banks were treated equally in the bond transaction as well as loan syndication, taking away a substantial part of the fee income, resulting in a strengthened relationship. A positive cash flow generation finally also enabled Merck to cancel the syndicated loan at closing of the acquisition without having drawn any loan at all, further reducing the fee expenses for Merck.

Uta Kemmerich-Keil explains “as the purchase price had to be paid in US dollars and Merck is a EUR based company, it was of vital importance that we were not hit by FX movements. In order to cap the potential purchase price in euros at our walk-away, if we succeeded in the acquisition, we bought an FX option as a protection against a worst case rate of $1.30. On a Sunday morning we won the auction ($1.35 that day) and already started at Sunday night German time to secure our purchase price by executing forwards with the opening of the Asian markets. After 20 hours of dealing straight through night and day we achieved to hedge all US dollar necessary. Through the distribution of timing and buying around the world this multiple billion-dollar transaction on a single day went without market turbulences. This transaction improved our purchase price on a three digit million euro value. The option was sold.”

A new Treasury Management System (TMS)

The second project involved the implementation of a Treasury Management System in 2010.

Treasury management system quantum: new system architecture

Benefits of the new set-up are increased transparency, more efficient risk management, enhanced operational processes, high degree of system flexibility and a single ‘source of truth’ for all treasury related data and analysis

Jörg Bermüller explains “with the introduction of the new TMS, Merck has created the ability to fully monitor and manage all financial risk at corporate level. The project team ensured a fast and in-time implementation despite major changes in the organisational structure of the group – like the acquisition of Millipore in 2010, for example. Millipore was integrated in all treasury systems at day one of the closing of the transaction. With the TMS, Merck is now able to effectively process a wide range of financial instruments and is in this way better able to monitor and manage financial risks of a growing global company.”

Global liquidity solution

Project three implemented a global zero balancing cash pooling solution in Denmark, Sweden, Norway, Finland, Estonia, Latvia, Czech Republic, Japan, Australia, New Zealand, Hong Kong, Singapore and China.

The centralisation of cash is performed by cash pooling and the In-house Bank serves as the cash pool leader of each cash pool (different set-up only in case of any country specific legal restrictions). Cash Pools in the major currencies were already in place.

In 2010, Merck Treasury extended the scope of the cash pool set-up and installed new cash pools in ten currencies. As a result, Merck Treasury was able to substantially increase the cash concentration rate (that is, cash held at the In-house Bank in relation to total cash). Furthermore, local entities profit from intercompany financing. The entire banking activities of the local subsidiaries in the affected countries were shifted to the new cash management partner bank. The euro and US dollar accounts of the affected subsidiaries were also integrated in the existing group cash pools. All this led to a significant reduction in the number of banking partners, bank accounts and overall banking fees.

Furthermore, the Merck In-house Bank replaced the Millipore In-house Bank on the day of closing the transaction taking over all financial positions and responsibilities. It became the cash pool leader of all former Millipore cash pools. Millipore’s manual notional US dollar cash pool was transformed to a fully automatic zero-balancing cash pool and Millipore’s euro cash pool was integrated in the European cash pool structure. In the course of the cash pool integration, the Millipore pricing was reduced considerably.

With the cash pools in the different countries Merck achieves high cash centralisation at its In-house Bank – Merck Financial Services GmbH. As the master accounts are held in each country, Merck profits from the use of the domestic clearing systems. Merck reduces its costs for payments as they can be executed domestically instead of cross-border.

Liquidity is centralised allowing Merck Treasury to achieve better interest results. Now Merck Treasury manages FX centrally profiting from more favourable pricings.

As Jörg Bermüller states a key principle at Merck is the In-house Bank should hold all the cash of the group. The objective of establishing additional cash pools was to increase the cash concentration rate and to facilitate intercompany financing.

Merck in China

The fourth project focused on a new China cash management set-up. In 2010 Merck was closely watching the Chinese government’s action to liberalise cash management and FX restrictions. Due to these legal restrictions, Merck was experiencing problems in establishing an optimal funding of the group’s growing business in China. Furthermore, management of CNY exposure showed room for improvement.

Merck created – as one of the first among German corporates – a CNY cash pooling structure in China. The new CNY cash pool now ensures the optimal distribution of liquidity between the group’s entities in China. In this way external borrowing costs have been further reduced.

In addition to the CNY cash pool, the In-house Bank opened a CNY account in Hong Kong in order to profit from more favourable on-shore FX rates compared to off-shore rates (via NDFs). These rates allow of up to 4% of savings. Some Merck subsidiaries in China are generating cash, others are not. Until 2010, the cash short entities were financed through loans. In 2010, Merck was among the first to implement a CNY cash pool in China and now the group benefits from inter-company financing.

The subsidiary with the highest turnover became the Pool Header. All subsidiaries in China opened accounts with the bank that was selected in China and transferred their entire banking business to the new cash management partner. The solution was implemented by using the entrustment loan structure in China.

The new CNY accounts in Hong Kong and Frankfurt allowed Merck to include CNY in its standard straight-through hedging process. All FX deals are now settled via an automated dealing platform. With an additional account in Germany Merck Treasury can now manage its CNY much better.

Merck has seen some impressive benefits as a result of the above projects in the following areas:

• Reduction in bank charges – time taken to implement the solution and realise benefits.
• Process efficiencies – reduction in bank credit lines.
• Cost savings.
• Productivity gains.
• Interest savings.
• Foreign exchange gains.

This is a most deserving winner of the coveted Top Treasury Team Award. On behalf of the entire team at Treasury Today, please accept our sincere congratulations.