With M&A volumes continuing at a high level, what role can corporate treasurers play in supporting the process – and where are the opportunities to add value?
The global M&A boom continues. Last year saw deals worth over US$3trn finalised – and the first quarter of 2018 brought the strongest ever start to the year, with deals totalling over US$1.2trn. Significant deals have included Bayer’s US$63bn acquisition of Monsanto.
“The market is extremely buoyant – and frankly, more buoyant than anyone expected going into 2018,” says Richard King, co-head of Global Corporate & Investment Banking, UK at Bank of America Merrill Lynch (BofAML). He notes that as well as strong volumes, the current market is also characterised by much larger transaction sizes, with numerous deals exceeding US$10bn announced in recent months.
Vincent Couche, Asia Sales Sector Head of Industrials for TTS at Citi, says that a number of factors are currently driving growth in M&A. “Financing is very cheap compared to historical averages, which makes many deals attractive,” he observes. “And the fact that the economy has slowed down globally has also created opportunities for companies to grow by buying market share.” He adds that some companies are looking to diversify their portfolios and balance their businesses across various industry lines, while some are selling down certain activities so that they can concentrate on others.
Of course, not all M&A deals are a roaring success. Figures published in June by Willis Towers Watson in partnership with Cass Business School revealed that quarterly global M&A performance – measured in terms of the acquiring company’s share price performance – was the lowest in Q2 since records began ten years ago. Given this caveat, what role can corporate treasurers play in making sure any acquisitions result in the desired outcome?
Role of the treasurer
For companies embarking on M&A activity, there is much to consider – and treasurers have an increasingly important role to play in that process. King points out that as a highly strategic area, M&A starts and finishes with the CEO and the Board – but that the treasury team and group treasurer are very much part of a company’s M&A team. He notes that since the financial crisis brought the importance of treasury into the spotlight, “treasurers now get involved at a much earlier stage of the M&A process than they might have done ten-15 years ago. In most cases today, they are brought in well before the transaction has been confirmed as definitely going ahead, to help with integration and synergy planning from a treasury perspective, and funding/risk management strategies.”
As such, there are four areas of M&A in which treasurers can play an important role: by supporting the due diligence that happens before the deal; financing the deal; settling the deal – and integrating the new acquisition into the company after the deal has been completed.
Before the deal
Couche points out that treasurers have a role to play at the earliest stage of the process, when the focus is on understanding the target’s shareholding structure – but “unfortunately they are not always engaged at that point”. As such, he says that treasurers should be proactive in stepping up and getting involved in this part of the process – “Don’t wait to be asked”.
In some cases, treasurers can play a role at the very earliest stages of the M&A process by advising on the implications of different locations from the perspective of currency controls, FX risk and trapped cash. “If the opportunity were to involve multiple jurisdictions, the treasurer would be able to identify optimal sources of financing and trading to minimise FX and other market price risks to advantage the M&A’s operations and integration within any existing operating model,” says Fulvio Barbuio, Board Director of the Finance and Treasury Association (FTA) in Australia and the former Head of Corporate Treasury & Risk at Australian Broadcasting Corporation. “This would also require the treasurer to integrate cash management and ongoing operational funding for the changed entity.”
Global information, software, and services company Wolters Kluwer has carried out M&A to the tune of roughly €200m-€300m per year since 2010, with recent acquisitions including last year’s purchase of Tagetik, provider of corporate performance management solutions, for €300m. “Getting involved as early as possible in the game is essential,” says George Dessing, Senior Vice President, Treasury & Risk. “It depends a bit on how large the deal is, but treasurers always need to stay close to the implications of a deal on leverage or debt levels; the discussions with banks and credit agencies and questions around valuation.” He adds, “The real question is, ‘do we actually get value for our money?’”
Naturally, one of the most important areas is that of financing. “The traditional role of the treasurer is in raising the financing to enable an acquisition or to manage debt,” says David Stebbings, Director, Head of Treasury Advisory at PwC. He points out that this can be a complex activity, depending on the scale of the deal and the geographies involved. “For example, if you’re in the UK and you’re buying something in the United States, do you borrow in the UK or in the US?”
Barbuio says that first and foremost, treasurers formulate “a financing plan aligned to the strategic plan which identifies sources of funding (both internal and external) available to the organisation giving it flexibility, diversity, capacity and cost effectiveness.” He explains that once a specific M&A deal has been identified, the treasurer can tailor financing from these sources that best matches the M&A in terms of factors such as source, structure, timing, drawdowns, repayments and refinancing.
“This would take into account any leverage, WACC, credit rating and risk management implications for the organisation which would have a bearing on its enterprise value, something it seeks to maximise for its shareholders and broader stakeholders,” he comments.
Settling the deal
When it comes to the settlement day, much will depend on how well the company has prepared beforehand. “If you haven’t prepared, your payments could be blocked because your financing line isn’t large enough,” warns Citi’s Couche. “If the payment doesn’t go through, you could miss the cut-off. It’s really about being very transparent with banking and technical partners – and with the target you’re acquiring – about how things are going to work.”
It’s also important to be aware of any practical obstacles that could prevent settlement from taking place. For example, Couche points out that clearing houses in the United States can only clear a maximum of US$10bn in one transaction, which can result in obstacles where mega mergers are concerned.