The treasurer’s financial analysis, presented to and discussed with the CFO and CEO, should confirm that they fully understand what could be at stake, in terms of, for example, the company’s equity requirements or maximum debt capacity, and especially regarding the timing and sequence of any acquisition.
It may transpire that pre-funding the deal is advantageous. In this instance, part of the financing is secured ahead of the transaction. This gives a bid greater credibility whilst avoiding the need, should progress be unexpectedly rapid, for expensive bridging facilities.
However, if in its analysis, treasury sees evidence that a proposed deal leads to a significant negative effect on key aspects such as credit ratings or covenants, or that it demands that borrowings are ramped up substantially, the pressure these issues add to the acquiring company’s existing exposures to credit markets, interest rates and FX, may suggest that the deal is not right and that management should reconsider.
Says Stark: “With its exceptional skillset of understanding capital markets and cash flows, its ability to unlock capital, and to manage currency volatility, treasury is in a unique position to add intelligence capable of demonstrating the value or otherwise of a deal.”
A pre-financed M&A deal will reduce the treasurer’s stress levels, says Philouze. But if not in place, and there is an investment bank mandated on the acquisition finance, then he says treasury may play an important role in ensuring that what is being negotiated with that bank is competitive, compatible with the acquiring corporate’s existing financial structure, and will not be overly complicated to manage post-deal.
In one illustration of the latter, Philouze cites a business where the T&Cs of a facility, arranged without CFO and treasury input, ring-fenced the US cash flows of the acquired business, limiting the immediate benefits of the financial integration of the acquisition.
Worse still, the terms did not permit any new debt to be raised in other parts of the group before the reimbursement of the acquisition finance put in place in the US. “It shows big mistakes can be made without treasury involvement,” he comments.
The reason for calling upon the treasurer is simple. “When an investment bank is mandated for M&A, financing is just a side-product,” explains Philouze. “For the bank, the priority is to secure the execution of the M&A and ensure the financing does not become a problem in that process; it has little interest in trying to optimise the financing that is being put in place. It is the role of the treasurer to have a say in the way new financing will be structured and put in place.”
From the moment a deal is struck, to the completion of the deal, the treasurer needs to take account of what needs to be put into place so that on day one, business can run as usual, adds Nicolaides.
“This notion is even more valid during a carve-out because sometimes if a small subsidiary or business unit is acquired, it will most likely not have its own treasury function,” he notes. “One will have to be put into place as soon as possible to enable continuity, and that requires planning.”
As an additional hurdle, where bank facilities and lines of credit are withdrawn from the acquired business, because they belong to the previous owner, the treasurer of the acquiring entity needs to get out there and start negotiating, making sure the relevant lines and facilities are in place for the acquired. And with each organisation having its own risk appetite, the treasurer also needs to consider how to adapt the newly acquired organisation to this.
Treasury planning should come to fruition post-deal. The to-do list might include operational integration, risk management policies, people and skills, amendments to the overall governance structure if the acquisition is sizeable (the need for treasury committees and sub-committees, for example), reporting processes between the acquired and treasury HQ, and of course systems and technology.
‘The first 100 days’, as the experience is often known, is a vital part of post-deal transitioning. In reality, this period can extend much longer than this and it may be that only six months later is the treasurer finally in a position to rationalise the business and, for example, deal with the two treasury centres that exist in the same country.
Treasury needs to consider its geographical footprint and start tackling structure sooner rather than later. But it is also important, from a strategic perspective, not to just think about what has been ‘inherited’, but also to review why the acquisition happened, and what the strategic objectives are, before adapting the longer-term outlook of treasury.
One further aspect with great importance is communication with the ratings agencies, says Philouze, especially where treasury has highlighted a potential impact by the deal on the credit profile of the acquiring company.
During the transaction, the acquiring business will have undertaken a lot of work to show the best credit story possible to the rating agency and the lenders. Now, post-deal, these relationships need to be managed, ensuring all stakeholders understand the benefits of that deal.
Post-deal, the existing debt of the target and the combined debt profile, may require restructuring by treasury. This may see centralisation of debt, but will certainly require action in terms of currency, maturity profiles and hedging. “Treasury may be looking at a lot of work to re-optimise its book of currency swaps and debt location,” cautions Philouze.
Role of digital
Of course, having treasury rooted on an island is never the most effective model. To be able to assist the organisation in the successful conclusion of the right deals, it must collaborate and, to an extent, integrate with other functions, allowing the smooth exchange of data. Few now would fail to recognise the increasing importance of technology in achieving this aim.
There is a basic requirement in any acquisition for treasury’s collaboration with other parts of the organisation to ensure support of a host of activities, from the supply chain and working capital, to cash flow and payments. But the necessity for treasury to be able to support the rapid and effective integration of acquisitions and larger scale mergers is most pressing.
If this is to happen, technologies from both sides of the deal must be able to communicate, says Stark. To be truly efficient requires what he calls a “holistic approach”, in effect, creating a “treasury enterprise system”.
The holistic approach he espouses provides an opportunity for treasurers to extract the intelligence and value that may be derived from a newly enlarged enterprise-wide pool of data. “The technology exists to do this; it’s now a matter of having the connectivity and processes in place,” he advises.
From the point of view of treasury’s involvement in M&A, “proactivity is the key”, advises Stark. “Being data-driven is the reality now, and for treasury, it’s about understanding how it can build more bridges.”
Nicolaides concurs, believing treasury’s involvement should start way before closure. “Initially, it is important for the treasurer to educate the CFO and CEO on what value treasury can add in this situation,” he says. “If they leave this until the transaction is well-underway, the time pressure of the deal means many aspects could be missed, with the CFO and CEO not realising that the treasurer is a key individual to have involved.”
But it is incumbent upon the treasurer to step beyond the role of ‘technical guru’, and begin thinking more commercially and strategically. It’s essential to explain complex treasury issues in non-technical language, so that all stakeholders within the M&A are successfully on-board and up to speed.
Taking the proactive stance, where the debt and credit profiles, pre-funding plans and integration tactics have already been worked on, should resonate with the CEO, not least because preparation could deliver huge savings.
More importantly, treasury’s early involvement indicates maximum credibility and financial firepower for the bid, says Philouze. “It allows the acquiring team to enter the process with a very assertive message to the sellers that they mean business.” In this highly competitive arena then, it may well be treasury who brings the deal home.