Treasury Practice

Making the most of M&A

Published: Nov 2013

The global economic downturn, along with the European sovereign debt crisis, political uncertainty in the US and slower economic growth in India and China, has dampened global merger and acquisition (M&A) activity. In the first three quarters of 2012, M&A activity had fallen by 17.4% compared to the comparable period in 2011, according to the paper ‘Merger and Acquisitions – 2013’ posted by Andrew Brownstein, Partner in the Corporate Department at Wachtell, Lipton, Rosen & Katzon, on the Harvard Law School Forum. However, in 4Q12 a number of large transactions pushed global M&A levels up to their highest in four years.

The paper cited a continuing, post-recession emphasis on deleveraging and strengthening corporate balance sheets, which made cost-saving M&A initiatives particularly valuable. “This is especially true for the many companies that have already exhausted their own cost-cutting opportunities, even as they have accumulated arsenals of deployable cash,” according to the paper. “And global market pressures, economic volatility and industry-specific factors across a wide array of industries put pressure on corporations to increase scale, diversify their asset base, seek operational synergies and spread costs across larger platforms.”

While the global picture for M&A is positive, it is patchy. In the UK, for example, the total number of domestic and cross-border M&A transactions fell by 42% in 2Q13, compared to the same quarter in 2012, according to the Office for National Statistics (ONS). The value of acquisitions of UK companies made by foreign companies in 2Q13 increased sizeably from £3.5 billion in 1Q13 to £23.4 billion. The number of transactions in 2Q13 also increased to 30 from 19 recorded in the previous quarter. However, the number fell when compared with the same quarter a year ago, which saw 48 transactions taking place.

The value of majority ownership acquisitions made by UK companies abroad (outward acquisitions) fell from £1.1 billion in 1Q13 to £0.6 billion in 2Q13 (current price basis). This was the lowest value for outward acquisitions since ONS first collected quarterly data in 1Q1987 (£1.7 billion).

Online information portal Statista reports that the total value of global M&As during the first half of 2013 was $896 billion, the majority of which took place in the energy, mining and utilities sector in the US. This high figure is despite the fact that, says Statista, “the M&A process is notoriously complicated and deals often fall through – empirical data shows high failure rates of M&A deals across the spectrum”.

As a result, corporate treasury and finance teams within global businesses are being called on to take a more strategic role in the whole process. Increasingly, they are tasked with supporting other parts of the business in decisions involving engagements with new markets, the development of new products and M&A activity.

Case study

The science of M&A

Portrait of Ed Paterson

Ed Paterson

Vice President and Assistant Treasurer

At EuroFinance Miami earlier this year, Ed Paterson, Vice President and Assistant Treasurer, Oracle, presented a session entitled ‘The science of M&A’. He went through a checklist similar to the AFP’s explaining how Oracle maximises its success in integrating new companies. The company is highly acquisitive and has successfully brought on board 85 companies since its first acquisition of PeopleSoft in 2005 – this equates to almost one a month. Paterson’s first tip for the treasurers in the audience was: “Although you can develop a blueprint for M&As, you will always need to refine it because no two companies are alike.”

In order to cope with the number of integration projects, Oracle treasury created a dedicated team of three people whose sole job is to focus on M&A activity. “They are involved in the due diligence process to understand the companies that we are buying at a granular level,” explained Paterson. “The key is early participation of treasury. It is easy to get into the mind-set of jumping into the whole integration piece after the company is bought, but it is important to get involved early on as part of an holistic approach.”

He identified two key integration milestones: change in control (CIC), which includes having the governmental approvals needed to close the transaction and pay the shareholders of the company; and the legal entity combination dates, which is the point at which the local subsidiaries are combined, including sales, payroll, etc, so that is just one balance sheet and one P&L statement. The team prioritises subsidiaries in terms of size and works closely with the company’s attorneys and tax department to ensure a smooth transition.

Paterson stressed the need to integrate quickly. “The longer integration takes, the more uncertainty begins to creep in and new priorities crop up. With 85 acquisitions over an eight-year period, we have had to move pretty quickly to integrate these companies.

“In order to do this, we focused on the important elements in each integration. We don’t sweat the small stuff. We focus our time are the main areas of finance such as cash management and banking, investments, debt, inter-company loans and FX. That is the bread and butter of all operations.”

Paterson identified the target timelines for each item on treasury’s checklist:

  • Adding Oracle signers to bank accounts: 45 days for global banks; 90 days for local banks.

  • Sweeping cash to Oracle, where possible, within 45 days.

  • Close AR accounts within 90 days; close AP accounts within 60 days.

  • Investments: liquidate investment programmes within a week; do not roll into Oracle investment portfolios.

  • Debt: outstanding credit lines and revolver agreements are paid off within 30 days.

  • Inter-company loans: scrub the balance sheets before legal entity combination dates.

  • FX hedging: terminate non-material hedging programmes within a month; or roll into Oracle programme within a quarter.

And the results are phenomenal. Oracle treasury acquired 1,870 accounts through acquisitions and the team has managed to close 1,648 – this leaves only 222 accounts that remain open and most are related to more recent acquisitions. “We report this metric to the Board and it is always an area of interest for them,” said Paterson. Treasury also has no outstanding investments nor term debt. There are 25 different bank lines outstanding related to bank guarantees, but this is where Paterson doesn’t “sweat the small stuff”. Oracle inherited more than 500 different inter-company loan combinations and at the time of the conference in May had reduced this number down to 50.

Role of the treasury

This is certainly true for a European Treasury Manager at a global retail eyewear company, which has been expanding both organically and through M&A activity. Most recently it acquired two companies in Europe, which are currently being integrated into the company’s structures. Treasury was involved in the merger process from the outset, providing capital injections and liaising with the legal departments, as well as staff within the new companies in order to ensure a smooth integration process. This can involve a lot of travelling time for treasury teams, in order to truly understand the new companies’ operations, as well as comprehend the banking and payment requirements if these acquisitions are located in new jurisdictions.

The total value of global M&As during the first half of 2013 was $896 billion, the majority of which took place in the energy, mining and utilities sector in the US.

Not everyone agrees that treasury is on the frontline when it comes to M&A activity. “Whenever an M&A – or some other change in leadership – occurs, the focus tends to be more on the CFO, rather than on the experts in the finance function,” says Suzzane Wood, Leader, Financial Officers Practice at global recruitment firm Russell Reynolds Associates. “The treasury function has more exposure in its relationship with banks, ratings agencies and advisers.”

However, most agree that treasury’s participation in the process is crucial for success. According to Lilian Burke, a Partner at PMC Treasury, fruitful M&A transactions occur only when a high number of co-ordinated treasury activities are effectively executed.

The treasury consultancy has been involved in a number of interim treasury operations. At US Clinical Supplies, for example, PMC was engaged after the company was divested from a global multinational corporation (MNC) and acquired by two private equity sponsors. The transaction was an asset purchase and PMC helped to establish the new business’s treasury and banking arrangements.

This work involved the establishment of operational banking for all the global businesses locally by organising banking arrangements in North America, Europe, Middle East and Asia, as well as Asia Pacific in terms of relationships, bank accounts and facilities for letters of credit (LCs) and guarantees. In addition, the company developed a reporting framework for short and medium-term cash forecasting together with liquidity management. It created a debt management model to manage covenant compliance, debt baskets and debt servicing requirements and helped to define treasury policy to govern all activity around the group. Finally, it managed various ancillary projects such as advising on interest rate risk management.

“The technology available today can allow treasury employees to devote more time to managing risk and banking relationships and to become more involved in business development and M&A.”

Carina Ruiz, a Partner at Deloitte & Touche LLP

In another similar transaction, a large Germany-based manufacturer of industrial compounds – with extensive international operations – was carved out of a major industrial conglomerate. Again, the company was acquired by private equity firms, which asked PMC to provide an interim treasury to manage the new business’s treasury affairs. Among its tasks, PMC reviewed the group’s foreign exchange (FX) exposures and recommended a new approach; organised and executed a redenomination of some of the group’s debt financing; implemented comprehensive debt forecasting; rationalised banking facilities; and developed several models to manage a leveraged debt package, including covenants, debt baskets and payments. Finally, PMC designed the new company’s target treasury structure and recruited the appropriate resources.

Change management

According to consultancy PwC, a key driver of the success of an M&A is the performance of the treasury function. The financial importance, operational significance and organisational complexity of the treasury function make it a bellwether of a deal’s success. PwC says it is critical for a treasury function to manage the risks inherent in a large scale transaction while also capitalising on the opportunities to strategically transform the newly formed organisation.

In a recent webcast, Carina Ruiz, a Partner at Deloitte & Touche LLP, said many treasury departments were now focused on how they can better use technology to spend less time on day-to-day tactical work; how they can shore up resources to be able to tackle the more complex global issues that companies face; and how they can think more externally to broaden their range of customers.

Standardisation and automation of transactional processes are reducing the amount of time needed for traditional treasury interfaces involving transactional processes for accounts payable (AP), accounts receivable (AR) and other areas. “The technology available today can allow treasury employees to devote more time to managing risk and banking relationships and to become more involved in business development and M&A,” she said. “This is a good time for treasury to be taking a closer look at how technology can be used more extensively to bring value to the business.”

In addition, the discipline of change management is very relevant to M&A activity. Any activity will bring about change, particularly at the top. Moreover, it is unlikely both treasuries will survive an M&A transaction.

Successful change management requires a management-wide approach before, during and after the process. Senior management must ensure that staff are mobilised and engaged in the change. Positive expectations need to be set and a communication strategy – whereby all employees are aware of the change and its implication – needs to be thought through. Any change can generate anxiety and uncertainty among staff and management need to address this from the outset.

It is incumbent on the corporate treasurer to understand the needs of the newly changed company and develop a strategy of how the treasury function will support those needs after an M&A transaction is closed.

Senior managers responsible for implementing the change often experience different types of resistance to change which can directly reduce the pace, intensity, effectiveness and value of end results of the change process.

Most companies struggle to successfully accomplish change processes, according to Accenture. It says a variety of studies suggest that between 50%-80% of change programmes do not live up to expectations. The consultancy cites a number of capabilities that should be in place – and integrated – to ensure a change, such as a merger or acquisition, is successful. These include:

  • Change strategy and planning.

  • Leadership alignment and development.

  • Stakeholder engagement and communications.

  • Change measurement.

  • Organisation readiness.

  • Cultural or behavioural change.

  • Ongoing capability to change.

  • Training and performance support.

Key to success

Many observers now believe that treasury departments must become involved in any M&A activity as early as possible. Treasury is responsible for managing cash generation, financial risks and access to capital markets – all of these aspects are critical to a successful merger or acquisition. If treasury staff are omitted from decision-making around M&A transactions, a company risks setting unrealistic goals or misaligning expectations when it comes to transforming the treasury.

It is incumbent on the corporate treasurer to understand the needs of the newly changed company and develop a strategy of how the treasury function will support those needs after an M&A transaction is closed. Areas to consider include IT requirements, external debt financing covenants, organisation structure, business models and operational inputs and outputs.

The Association for Finance Professionals (AFP) in the US has published a checklist for treasury’s role in M&As, from an acquirer’s perspective. The idea of the checklist is to provide a list of the different areas that could affect treasury during the due diligence and integration phases. The AFP says the checklist should help to alleviate some of the burden treasury departments face in making sure they have met and mitigated their concerns around the uncertainty of collecting important information.

The categories in the checklist are:

  • Bank relationships and accounts.

  • Debt.

  • Investments.

  • FX/commodities.

  • LCs, bank guarantees and comfort letters.

  • Benefit plans.

  • Insurance-related items.

During the due diligence phase, corporate treasurers should never assume that the buyer, acquirer or advising bank has ticked all the boxes. Pension liabilities and medical insurance obligations often are overlooked or not fully taken into account during an acquisition. Such liabilities can have a significant impact on the financial aspect of a merger or acquisition.

The role of treasury is also intrinsic to the financing aspects of a merger or acquisition. Acquisitions are by their nature complex and can be financed by a range of different structures. These need to be fully examined, as do the debts held by the acquisition target. Pre-arranged credit lines and structured finance arrangements must be controlled and understood.

Also, treasurers need to ensure that working capital finance is available, all banking mandates are changed through authorised signatures and that all banking accounts are properly arranged. “Treasurers are critical to ensuring continuity of banking relationships,” adds Wood.

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