In a globalised world where value-creation counts, M&A deals are big news. Opportunities abound yet they are potentially complex and resource-intensive, with no guarantee of success. We explore the role that treasurers have in managing the risks and opportunities pre- and post-deal.
The current market buoyancy for M&A deals is a result of increased opportunity and confidence in the global markets. With stock markets performing well, valuations are on the rise. Yet according to EY’s Global Vice Chair of Transaction Advisory Services, Steve Krouskos, 2019’s global M&A market “is expected to remain at elevated levels while the imperative to manage emerging opportunities and risks boosts M&A appetite”.
Indeed, he says in EY’s Global Capital Confidence Barometer that, in an age of transformation, “buying rather than building can unlock future value creation at speed”. His report notes too that “competitive dynamics as they relate to technology and globalisation make M&A more of an imperative than an option” and that companies are “embracing uncertainty rather than being unsettled by it”.
With strategic thinking around competitive advantage, and future market share front of mind (often to access new customers or geographies, to leverage new IP or brand value, or to secure operational advantages), Krouskos further records that executives are expecting to see many peers “targeting the right asset at the right time”. He also notes that, in many cases, “the right asset is the same asset”. M&A competition, it seems, is intensifying.
The competitive nature of M&A means getting the details of the deal right first time is vital for success. However, the definition of ‘successful deal’ is subjective, notes Dino Nicolaides, MD, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory.
“In my view, it must deliver the strategic, commercial or operational benefit anticipated at the outset. Under no circumstances should the return on capital (ROC) be below the weighted average cost of capital (WACC), simply because that would mean the deal has failed to add value.”
Thus, there is a huge expectation to perform in this respect, and the role of the treasurer in supporting a successful deal has never been more important. Indeed, treasurers, notes Nicolaides, have often been involved in ensuring the swift unlocking of the value of new acquisitions.
This means they will, for example, use their cash, capital markets and FX levers (that are, ideally, already finely-tuned within their own organisation) to ensure there are no impediments when integrating the financial operations of the new organisation.
However, even earlier and more upfront involvement is clearly essential to bring about value-adding success, not least, for example, with regard to optimising the structuring and management of any debt raised for a deal. With M&A movements, the treasurer has genuine strategic importance, with the role being far more aligned with the broader objectives of successful activity in this field.
So how ready is treasury to provide the essential data and analysis? “The biggest test in this respect is whether they are meeting all of the CFOs needs, even without the looming idea of an acquisition,” says Bob Stark, VP of Strategy at Kyriba.
This, he explains, not only means ensuring currency operations are finely tuned, but also making sure cash forecasts are efficient from a cash flow perspective. It also means making sure there are no concerns around the efficiency of cash and liquidity structures; that there are no questions around the capital markets composition, nor around the ability of the business to use these levers to unlock further cash and liquidity to facilitate acquisitions.
Only when treasury is meeting the CFO’s evolving needs and supporting the CEO and board in their financial strategies, Stark says that is when the function is best placed to take a seat at the table, “offering credible opinions in terms of the value of potential acquisitions”.
One area of particular M&A concern today is the FX side of a deal, says Stark. “With today’s currency volatility, it is not just the purchase price that can be affected by movement; it can also impact the unlocking of value within the acquired entity itself,” he warns.
Businesses are facing increased market volatility and, as they compete for the right deals, they are also acquiring in new geographies, so potentially dealing with new operating currencies too. This combination creates the perfect ‘FX storm’.
“Treasury has a keen understanding of the impact of currency movements on the balance sheet and cash flows, and is well-positioned to identify opportunities that may arise too,” suggests Stark. In practice, treasury knowledge could even give rise to an adjustment of the purchase price or the financing of the deal, and is likely to inform the putting on of appropriate hedges earlier in the process to ensure that risk is mitigated.
This is important. A sudden unprotected FX spike in the wrong direction can prove costly at closure, not just on price but also on the entire composition of the balance sheet. “Currency volatility can completely change the value of an acquisition,” warns Stark. “This can be true even when acquiring in the same currency if the acquired enterprise has a significant FX component through its operations.”
It should be clear then that the treasurer’s earliest involvement in an acquisition is crucial to ensure that the deal is not exposed to a sudden loss of value. It is manifestly suboptimal if treasury is only able to understand what the business is exposed to after the fact. For the deal to be a success, treasury needs to know upfront how the balance sheet and P&L changes, what the cash flow statement looks like globally, what hedges are on or off, and even just the general liquidity structure of the acquired business.
Understanding the full financial position of the target company going into a deal means treasury is able to prepare the ground for a quick and efficient integration – and any remedial action – if that deal concludes successfully.
Stark argues powerfully that success should not be compromised in any way by something as fundamental as currency exposures. This is why, increasingly, treasurers are invited to take up a seat at the table, not just as part of an operational M&A team ensuring a specific deal is executed, but also as a key part of the evaluation process of opportunities and potential deals.
Assuming treasury readiness, there is a pre-deal advisory element for treasurers that arises even before a target has been identified, says Didier Philouze, MD, Global Head of Debt Advisory, Redbridge Debt & Treasury Advisory. Treasurers need to analyse the impact of any new strategic change of direction, including any move towards M&A or significant growth, he says.
“If management wants to double the size of the business through multiple acquisitions, clearly this could have a meaningful impact on the way the business generates profits, the volatility of its cash flows and on its credit profile. It could also have an impact on its liquidity requirements,” warns Philouze. “If treasury is to have a say in the way M&A is managed, it needs to offer a clear view of the financial effects of the deal; without that view, the business could make a huge mistake in its M&A model in terms of debt quantum or cost of debt.”
Being data-driven is the reality now, and for treasury, it’s about understanding how it can build more bridges.
Bob Stark, VP of Strategy, Kyriba
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.
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.