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.
Vice President & Treasurer
How would you describe the treasurer’s role in M&A?
The role of the treasurer is critical, particularly in large deals, where choosing the right acquisition financing strategy will have a long-term impact in credit ratings, debt covenants, financial synergies, and liquidity. The treasurer not only advises the CFO on M&A capital structure but also executes on the financing and payment of the acquisition. A treasurer’s M&A financing experience will be especially valuable in challenging economic conditions and cross-border deals.
What involvement have you had in M&A?
Depending on the acquisition, my involvement has ranged from planning the financing strategy to integrating cash management systems and operations. One thing I learned from my prior years in private equity is not to underestimate the general view that every acquisition is different and unique. That forces me to prioritise on customising the M&A process over spending too much time on a template of due diligence questions. While most principles for treasury M&A are the same, the focus on a “unique process” for a “unique deal” is very useful to anticipate issues and allocate the right resources upfront.
How have you added-value to the process?
Treasury can add significant value by managing the FX risk of cross-border M&A deals, especially during periods of financial volatility. For example, I have protected the cash value of multibillion dollar deals by hedging the acquisition payment against FX fluctuations between the time of signing and closing. A proactive post-integration FX hedging plan is also important since FX exposures may be unintentionally created during the transition of the target’s balance sheet into the buyer’s balance sheet.
What challenges did you need to overcome?
The main challenge to overcome is having limited information during the due diligence that could later complicate integration activities. To deal with this potential issue it is helpful to complement the data room with a couple of pre-closing meetings with the target. This could be arranged in a way not to overwhelm the target’s team with unnecessary requests.
How important is it for treasurers to take a proactive approach where M&A is concerned?
It is important to get involved early in the M&A process because it takes planning and coordination to avoid potential liquidity issues post-closing. This upfront planning is also needed for the design of contingency plans, especially if there are critical dependencies for closing, such as securing debt financing.
What advice would you give to other treasurers when getting involved with M&A for the first time?
Regardless of the deal’s dynamics and competing M&A priorities, treasury’s number one objective for day one should always be having full control and visibility of the target’s cash. This will minimise the risk of business disruption, potential fraud, investment losses, and liquidity and credit issues. Securing the cash on day one should be prime responsibility for any treasurer.
Integrating the new business
Settling the deal isn’t the end of the story and integrating a new acquisition into the existing company takes time and planning. “Treasurers need to consider how they will integrate the new business into their cash management, FX management and banking structures,” says Stebbings. “Or if they are demerging part of the entity, they will need to consider how they set up a separate treasury function for it, including the systems and operational aspects.”
“It’s important to integrate quickly, but it can take a month or two to open up new accounts and integrate the payments and hedging processes. Having visibility over cash flows should be the number one priority.”
Vincent Couche, Asia Sales Sector Head of Industrials for TTS, Citi
In practice, the integration process cannot be done and dusted on day one but will need to be managed over a period of time. For example, essential tasks will need to be completed on the day of completion, such as updating bank account signers when necessary and putting in place the required sweeping and funding mechanisms. Other tasks can be scheduled in the following weeks or months, from training staff who have joined from the acquired company to rationalising the number of bank relationships and bank accounts. Further down the line, treasurers may then begin to look at integrating their treasury systems and centralisation structures.
“The number one goal is to ensure the continuity of business,” explains Couche. “It’s important to integrate quickly, but it can take a month or two to open up new accounts and integrate the payments and hedging processes. Having visibility over cash flows should be the number one priority.”
The ingredients of success
So what should treasurers bear in mind when playing a role in M&A? For one thing, it’s important to pay close attention to timings and to make sure the necessary resources are available when needed. However, this isn’t always straightforward: BofAML’s King says that there is a certain amount of ebb and flow during the M&A process. “Deals can go quiet for weeks or months, and then become extremely busy,” he explains. “Once the price has been agreed, everything will need to be done in a matter of days – so managing resourcing within the treasury team is not an easy matter.”
Also essential is a treasurer’s ability to communicate effectively with other parties involved in the process. Barbuio says that in order to deliver on M&A objectives, a treasurer needs to be a strong communicator and influencer, both with internal stakeholders and with external advisors. “This would require strong and highly developed commercial and soft skills, with the treasury/analytical skills being a given,” he comments.
Dessing also notes the importance of teamwork where M&A is concerned. “We have to make sure that we are in close discussion with the M&A deal team leading the transactions from the beginning,” he says. “You also have to make sure that the interconnection between finance, accounting, legal and tax teams is secured. Likewise, investor relations has to know how the external world will react to certain M&A deals. So I would say it’s truly a team play. In treasury you cannot simply sit behind your PC – you need to literally walk around and make sure you have the right information.”
Finally, Dessing says it is important to have a team which has a can-do attitude and be mindful of the energy that is needed during the M&A process. “At the end of the day, buying new companies is fun and exciting, but it’s also time consuming, requires a lot of energy – and is always pretty urgent,” he says. “So you can’t just say you are out of the office for a couple of days, because the transaction still needs to go ahead.”
Planning for success
Bank of America Merrill Lynch suggests that treasurers ask the following questions in order to plan for success when undertaking mergers, acquisitions and divestitures (MA&D):
Have appropriate controls been put in place for compliance, audit and risk management?
Have you established a cash monitoring and funding process to ensure cash visibility and control?
Do you understand the regulatory, tax, treasury practices and instruments in the new geographies where the NewCo will operate?
Would you replicate the current setup for a carve out, or would you look to take advantage of opportunistic redesign?
How will you accommodate the differing investment grade and liquidity needs of the NewCo?
Do you see opportunities for treasury enhancements for the NewCo?
Does treasury have full access to resources needed to integrate the acquired company?
Is MA&D part of your core group strategy? What is the role played by your treasury in MA&D events?