Continuing our popular series of interviews with senior figures in the world of treasury and finance, this month talking to Peter Rodger, Group Tax and Treasury Manager, Degussa UK Holdings Ltd.

Degussa is the world’s largest speciality chemical company and is headquartered in Germany. Registered in September 2001, Degussa AG is the result of a merger between SKW Trostberg and Degussa-Hüls, which was originally agreed in October 2000. The company acquired Laporte plc in March 2001. Laporte plc manufactured and distributed speciality chemicals and performance materials. The corporate HQ of the former Laporte plc became Degussa UK Holdings Ltd.

Degussa is now organised into six divisions – Health & Nutrition, Construction Chemicals, Fine & Industrial Chemicals, Performance Chemicals, Coatings & Advanced Fillers and Speciality Polymers. Its core operations currently generate sales of approximately €10 billion. The company has approximately 45,000 employees worldwide.

How has the takeover by Degussa affected the treasury here?

Prior to the takeover to the merger with Degussa, we had sold 55% of the operating Group to KKR. This resulted in a reduction in staffing numbers at the head office (the former corporate headquarters for Laporte plc), which included combining tax and treasury. Tax and treasury were used to working very closely together in Laporte – whenever treasury wanted to set up a new funding structure, there were tax implications and, for any tax driven activity, cash movements were usually needed.

I was previously responsible for tax, but inherited an excellent Treasury team from my predecessor, so there was little additional work involved. However, the merger resulted in a further reduction in numbers. Of the two people working for me in treasury before the merger, the dealer left, because, post-merger, there were fewer deals required and we had a greater need for a cash manager. On the tax side, the position was the same – post-merger, fewer tax people were needed.

What was Degussa’s perspective?

Degussa’s view, like those of many multi-nationals, is that most treasury functions should be run, or at least controlled, from the centre. They took control of depositing and funding requirements very quickly. In addition, Degussa has its own in-house bank. We were left with two main responsibilities:

• UK cash management.

  This runs through Barclays and we brought Degussa’s existing UK businesses within it. If necessary, it could be run from Germany, just as Laporte used to run its US cash management out of London.

• Global cash pooling.

  Bank Mendes Gans (BMG) in the Netherlands ran the global cash pool for Laporte. We retained the management of that under Degussa for all the old Laporte companies. Degussa’s UK subsidiaries were also brought into it because they had come into our UK cash pooling. When the old Degussa subsidiaries joined the cash pool at Barclays, they closed all their existing foreign currency accounts. By joining the BMG system, they can pool with us and BMG does all their foreign currency hedging for them.

How does this cash pooling system work?

The BMG system provides a number of services principal of which is notional cross currency cash pooling. The old Laporte companies worldwide and the Degussa UK companies notionally pool their foreign currency balances within the BMG system. Surplus balances in the local functional currency cash pools for each territory can also be transferred to or from the pool, thereby ensuring the best use of surplus cash resources. Prior to Degussa’s involvement, this pool was balanced overnight by a UK company depositing or withdrawing a sterling amount. Since the change of control, this balancing function is performed in Euro with surplus cash transferred to Degussa AG Treasury in Germany and any shortage called upon from Germany.

We also run an internal forward currency hedging for the operating subsidiaries through BMG and use it for foreign currency payments.

Degussa have expressed interest in using the BMG system, but it is a complicated decision as Degussa has an in-house bank. At present, there is still a decision to be made about the future of the BMG system within the group – whether to continue as it is or to widen its sphere. Having said that, some of the territorial cash pools that we used to operate as Laporte now operate within Degussa’s local pooling because it made sense to use only one, just as it made sense for us to take Degussa’s UK subsidiaries into the UK pool. Any sterling surplus from the UK cash pool (run through Barclays) is cleared to an account with BMG.

Once Degussa’s takeover of Laporte took place, how did the transition work within the treasury department?

The transition within the treasury department was probably one of the more efficient within the group. Degussa’s top management had taken a decision not to allow Degussa people to come in en masse straightaway – they didn’t want to be seen as heavy-handed. As we had already waited for three months from the original announcement to the completion of the acquisition in mid-March 2001, this was a bit frustrating, as it led to some uncertainty and decisions were required in some areas. The Degussa treasury team were one of the first to meet with Laporte in early to mid-April.

When the Degussa treasury team came, their first requirement was to find out what we did and what balances, currencies, funding structures etc existed. Once we had explained our positions to them, it was broadly up to them to decide how to move forward. I think that they had a fairly good idea as to what they wanted to do and these were ideas were expanded within the first few months. Everything that was going to be done was done by Christmas or soon after.

What did they decide?

As a sterling group, Laporte had hedged against the euro. This was not appropriate for Degussa as a euro group, so these hedges came out fairly quickly. Laporte had a lot of balance sheet hedges in terms of swaps or currency borrowings. Degussa had hedged their investment in Laporte in a fairly general way, because they were unsure of what currency values they were going to need to hedge against. Most of the swaps were unwound by the end of the third quarter.

There was one exception, which was in respect of the dollar hedges, where Degussa’s position was the same as Laporte’s and they took a similar approach. We had some fairly long-term dollar funding with swaps on. Degussa decided to keep that for the time being, although that could change in the future.

Did you notice a difference in perspective?

The Degussa group treasury look at these exposures from a global Degussa position, as we did before the change of ownership. Now, however, we operate from a regional position. For example, whilst I might want to hedge my Dutch investments for my book, Degussa treasury would be taking a view from the perspective of the whole group.

In most cases, we made our comments and then Degussa took a global view. However, we also have a responsibility to make sure that the centre understands all the tax implications of any action. For example, before the merger, Laporte divested of some of its business, resulting in surplus cash. Degussa’s first instinct was that they wanted this surplus cash moved to Germany. I knew that it was probably not tax efficient to do that – although I didn’t know what the tax position in Germany was, I was fairly confident that we were paying less tax than they were.

What were the major difficulties?

The transition was complicated by the fact that Degussa was also merging with another German company (SKW), which wasn’t formalised until after the Laporte acquisition because of the minority shareholders. This put the Degussa treasury under a lot of time pressure and I don’t think that they were able to react to the acquisition of Laporte as quickly as they would have liked.

Secondly, the reporting requirements were quite difficult to get used to. Degussa now reports under US GAAP. We were probably in a better position to comply with US GAAP than the centre in Germany – UK GAAP is closer to US GAAP than the German equivalent. Under US GAAP, we have to report all the balances and value all the derivatives quarterly. The first report was due in June. This was time-consuming as it always is initially. However, another reason was that there was a lack of clarity as to what was required from both sides and some things were confused in translation. But having done it once, the report is relatively straightforward to complete again.

How are you held responsible now?

My functions are now more tax based and most of the treasury interaction is with the UK cash manager. I see my treasury role as more of a control function within what remains of the UK treasury department. As I mentioned, we are still responsible for the currency hedging for the former Laporte subsidiaries. These companies provide a rolling 12 month currency forecast each month, which can cover any currency, but the main currencies are US dollars, Euros and sterling for the non-UK companies. Every month the net amounts are then hedged externally. Effectively the UK treasury department is entering internal forward contracts with each operating company and balancing the net differences externally.

Degussa has a very detailed quarterly cash reporting system. It would be too complicated to report all the internal hedges for each subsidiary, as that could result in around 250 individual contracts per subsidiary every quarter. After some discussion, it was agreed that no benefit would arise from increasing the workload to report all these internal contracts.

We also talk regularly to Germany and they do ask us questions. Most of these questions come up after the accounting at the end of every quarter. Mostly these questions will be put directly to the cash manager. My interaction is now limited to one-offs, usually tax-treasury deals.

How about internal controls?

We do have controls here and, to some extent, we carry on with what we have always done. We have changed the authorisation limits such that they are now more restrictive than they used to be. We did this because we felt that the previous authorisation levels were set too high for what we now have to do. The UK head office management proposed the new authority limits to the head office in Germany.

Are there any lessons that you can draw from your experiences of both taking over other companies and being taken over?

It is important to take a transition in stages. I think that Degussa did do this well.

The first stage should involve the acquiring company gathering information about the acquired company’s treasury. This should involve identifying what happens, what systems are in place, whether it works and whether the acquired company performs any of these tasks better than the acquiring company.

Once the information has been acquired it is important not to impose anything too quickly – if you try to force the pace on any issue, then the new subsidiaries will be against that change. This was important when we were integrating the UK Degussa companies into the UK and BMG cash pooling systems. Although Degussa was taking over Laporte, it had been determined by Degussa treasury that the UK Degussa companies would come into the UK cash pool. The nine legacy UK Degussa companies had enjoyed greater control over their businesses, with no experience of doing anything centrally, such that they used all the UK high street banks between them. Integrating them was fairly straightforward – we introduced them to Barclays, who opened the accounts. Because of the need to sell the idea to the business units, it took a little longer than the six weeks that I thought it would. The managers were receptive to the idea because they could see the benefits, although they were a little nervous about the loss of control and, in particular, working with the BMG system. However, once they did the first deal with BMG they could immediately see the benefits as it released them from half a day a week spent balancing transactions.

With a merger, the question is to find the most efficient way of putting two systems together. The timing is crucial – there is always a reason why it can’t be done this week. It is also important not to antagonise people. The majority of people will come in gradually – the ones who are difficult will need something from the centre sooner or later and will then see the benefit of the change. It’s not just about self-interest, but people are nervous of change and don’t like it being imposed on them.

Group treasurers tell me that local treasurers are usually pleased to give up the responsibility. Do you think this is true?

Yes, in most cases. Cash spending has to be controlled within a budget. Any large projects have to be justified anyway. Working capital has to be managed and controlled within the established framework. The local treasurer, who is normally the accountant handling all aspects of finance, does not want to worry about the cost of finance and where to get it, when the group treasury is expert in that.

There are exceptions. It is usually the finance director (rather than treasurer) of a small company who is affected the most. They don’t mind losing the day-to-day hassle, but sometimes, particularly in some countries, they feel a loss of status in the local community. The only people who are likely to get upset are those who have ambitions to be a group finance director and therefore need to keep abreast of the latest developments.

Does this argument work for you?

That’s a leading question! There wouldn’t have been a job for me if I had just been doing the treasury role, however I still have a lot of legacy tax issues to deal with – these will take up to two years to sort out. In most takeovers, even in cross border deals such as this, I would expect the treasury function to disappear within twelve months except if it became an adjunct of the corporate centre.