Treasury Practice

All together now

Published: May 2022

With merger and acquisition activity showing little sign of slowing down, treasury teams need to ensure they are prepared for the challenges of integrating disparate systems and teams.

Paper chain of people

Market data from PwC suggests 2021 was a record-breaking year for M&A, with the number of deals completed globally rising by almost a quarter (24%) compared to 2020 and deal value increasing by 57% over the same period. One of the main factors behind this growth was portfolio reviews triggering a wave of divestitures across industries as corporate dealmakers seek to reinvest and optimise their assets.

According to PwC, private equity firms were sitting on a record US$2.3trn of capital that was committed to investment but not yet allocated by the end of last year.

Refinitiv reports that between January and March 2022, worldwide M&A activity pushed past US$1trn for the seventh consecutive quarter despite rising geopolitical tensions that are prompting corporate decision makers to consider a ‘pause’.

So although higher interest rates, rising inflation, increased taxes and greater regulation could pose structural or financial hurdles for completing deals in 2022, there are likely to be plenty more major deals done over the coming months.

So what does this mean for treasury teams? Damian Glendinning is Chairman of the advisory board at treasury intelligence firm CompleXCountries, which hosts confidential peer discussions where subject matter experts share their approaches to a specific complex treasury problem.

During a call with a member whose company was in the midst of a significant acquisition and wished to benchmark its approach, the difficulty in obtaining information on the acquired entity before the deal closes was highlighted as a consistent challenge that made it difficult to operate effectively from day one.

Suggested solutions included:

  • Finding out whether the target entity uses any of the same banks as the acquirer (who may be concerned about potential loss of business).
  • Reminding management and HR that payroll cannot be paid unless a banking structure is in place.
  • Negotiating with the selling entity for it to continue cash management operations for a period after the deal has closed.

Glendinning notes that participants on the call referred to the importance of clarity on the tax structure and business model as well as IT systems – for example, determining whether the acquired entity will be moved onto the group ERP system. They also suggested that it was not unheard of for acquired treasury teams to overstate legal and regulatory issues relating to sharing of data to avoid being centralised.

Rhonda Kruman (a consultant in the corporate treasury consulting group for commercial banking at J.P. Morgan who focuses on providing treasury management expertise to clients executing mergers and acquisitions) identifies consolidating online banking portals as an important aspect of integration with a focus on streamlining account visibility and reducing costs.

She recognises that not every company requires full integration of its treasury, payables and receivables processes in its post-acquisition structure and that there may be strategic reasons for keeping functions separate.

Treasury’s remit should be defined clearly to understand which activities need to be assessed and how to structure the roles and responsibilities within the new treasury organisation.

Sander de Vries, Director of Treasury, Zanders

Kruman also recommends leveraging banking partners who can offer useful insight into implementation timeframes and functions and provide a treasury point of view to help address considerations of all impacted parties.

“The most important factors to consider when merging or integrating treasury departments are the ‘big four’ elements that comprise treasury and its operations – policy, process, people and banking,” says Adrian Rodgers, Director of treasury consultancy ARC Solutions.

Policies require urgent review and approval by executive management to ensure that they are fit for purpose for the new, merged organisation and reflect its concerns and objectives while processes need to be tailored or re-engineered to ensure they actually reflect and deliver on policy objectives.

Case study

Global financial services provider Apex Group has made more than 20 acquisitions over the last five years, most recently acquiring its FTSE 250 competitor Sanne Group in a deal worth £1.5bn.

The treasury team works closely with corporate finance and the M&A lead at the outset of each proposed acquisition, developing projection models and playing a crucial role in deciding the appropriate financing facility.

Once the transaction has closed, the team moves on to the process of bringing the treasury elements of the newly acquired business – including banking, cash management, hedging, investments and risk management – into the group’s programme.

“We have a standard playbook that is applied to every acquired business and starts with getting to grips with its bank accounts and bank account structures and its FX hedging requirements,” explains Marcus Worsley, Group Treasurer, Apex Group. “We have a strong focus on working capital management as a business driver so the new entity is brought into our way of managing working capital, which means enhanced collections and billing.”

Regardless of the size of the acquired company Apex looks to migrate it onto the main ERP system, although if there is an existing system in place the acquired company may continue to use that for a while as the integration process is completed.

“We have a number of treasury vehicles within the group where all our debt and liquidity and revolving facilities sit, so one of the first things we do is implement automatic cash sweeping,” adds Worsley. “We don’t hold significant amounts of cash in subsidiary entities.”

Treasury has responsibility for all working capital with the group so all of the entity’s billing, credit control and payments need to be centralised. The team works with the integration and group finance teams to make sure internal working capital facilities are in place and the accounting structure and reporting structure is mapped onto the group’s main ERP and accounting ledger.

In the early stages of a deal the details are communicated to a relatively small number of people, but this group expands once the financing has been confirmed. Worsley explains that the cash management team tends to get brought into these conversations earlier than the billing or payments teams.

“There are numerous meetings to explain how Apex works and how the acquired company team will be onboarded,” he adds.

Over the medium term the acquired business is fully integrated into the central billing team and the main ERP and billing system. It is concurrently integrated with the payments and AP team and onto the group’s vendor management and PO processing systems in conjunction with the ERP so that policies and procedures are standardised across the group.

“The acquisitions that present unexpected challenges are those where the processes of the acquired company are better than ours, in which case we pick up these processes and embed them within our business,” says Worsley. “The billing or cash collection process may be more efficient, or the company may have systems for working capital management that we hadn’t considered.”

For this reason he believes it is important not to assume that your practices will always be better than those of the companies you acquire.

“When we are doing the due diligence we will look at the KPIs the acquired company is producing and how they compare to our KPIs to see where both entities can do things better,” adds Worsley. “We also look at all the processes used from cash matching and reconciliation through billing to credit control.”

“The organisational structure similarly needs to be re-engineered to put appropriately skilled people in the right roles,” adds Rodgers. “Finally, the banking structure needs to be updated to eliminate redundancy, fill coverage gaps and support the business needs of the merged group.”

According to Sander de Vries, Director of treasury consultancy Zanders, it is crucial to understand the changes in the underlying business and how this translates into the requirements the new entity has with regard to treasury activities.

“Treasury’s remit should be defined clearly to understand which activities need to be assessed and how to structure the roles and responsibilities within the new treasury organisation,” he says. “Change management is crucial to ensure a smooth transition so it is important to consider the aspect of culture when defining a plan of approach.”

Kruman reckons integration represents a unique opportunity for the combined enterprise to evaluate treasury environments and identify synergies across systems, processes and teams. She suggests that by thinking strategically about the future needs of the consolidated business, treasury groups can use the integration period to adopt best practices and introduce efficiencies.

de Vries describes the integration process as an opportunity to further professionalise the treasury organisation and its systems although in practice integration timelines are often short, which means the transformation is system-oriented and processes are adjusted to the system’s capabilities.

“Ideally, treasury should invest a bit more time in considering which current processes best fit the new entity and how these can be optimised (for example, by means of automation) to ensure all treasury processes are future proof,” he says.

The acquisitions that present unexpected challenges are those where the processes of the acquired company are better than ours, in which case we pick up these processes and embed them within our business.

Marcus Worsley, Group Treasurer, Apex Group

“The challenge is to find C-suite sponsors who can ensure time is spent on a thorough assessment of treasury activities instead of having treasury focus on short-term oriented integration work. Once there is a clear overview of future processes, treasury should assess if the current treasury system landscape is still future proof. A good understanding of market developments and available system capabilities is paramount.”

The system challenges are often not related to the increased volumes, but more to the increased complexity and to what extent processes are automated. Treasury should determine how processes fit in the treasury management systems and how the additional company/companies and potentially different ERP systems are mapped to treasury.

“To prevent operational bottlenecks it is vital to assess how processes can be implemented in an automated and efficient way with the right treasury system or systems,” adds de Vries.

The integration process is not only an opportunity to review systems and see where improvements could be made but a requirement, since updated policy objectives and re-engineered processes may not sit well with the existing systems architecture says Rodgers.

“In addition, in many cases both merged entities may have existing systems architectures which need to be replaced by a new harmonised infrastructure,” he says. “In the best case scenario one of the entities may have systems which can support the other entity’s needs, but even in this instance there are questions and challenges around data cleansing, migration and cutover.”

Rodgers says the extent to which treasury management systems are sufficiently scalable to handle an increase in volumes as a result of merger or acquisition depends on the system – and specifically its age and design. “In theory (and often in practice) SaaS provides instant provisioning of resources whereas older, non-SaaS systems may have limitations on storage and throughput, particularly if complex calculations are required,” he concludes.

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