Knowing how to seal the deal
Mergers and acquisitions (M&A) have bounced back on to the corporate agenda in 2014 after tailing off dramatically in the wake of the financial crisis. According to figures from Thomson Reuters, the value of global M&A activity was up 54 per cent in the first quarter of this year, compared with the same period in 2013, with deals totalling $710 billion.
This resurgence in M&A is adding to corporate treasurers’ already long to-do lists since they are increasingly influential in setting business strategy. While treasurers have always been involved in arranging and structuring the funding that underpins M&A, boards are now drawing on their expertise in areas such as cash and liquidity, regulation and risk management before a deal is even on the table.
Arguably, input from treasury is key even when an acquisition is little more than a twinkle in the chief executive’s eye. Treasury will want to manage the company’s debt maturity profile to ideally prevent it from having to undertake refinancing activity at the same time an acquisition is being carried out.
“The market may not necessarily be open at the time you want to complete a transaction,” observes David Tilston, group finance director of banknote substrate maker Innovia. “So you don’t want to find yourself in a situation where you want to do a deal, but you don’t have the money available.”
The increased complexity of many M&A deals is another important reason why treasurers need to be involved in an early stage, according to David Stebbings, head of treasury advisory at professional services network PwC.
“Many M&A deals are in high-growth markets where business issues and treasury issues are more complex,” he says. “There is more regulation about how you move cash around, make payments, undertake FX [foreign exchange] and work with local banks.”
Furthermore, the ownership structures for deals in high-growth markets can be complicated, often involving joint ventures and partnership arrangements. By getting on board early, treasury can understand the post-deal ownership structure of the target business and how it will affect the transfer of payments between the owners in future.
Due diligence is a vital part of any M&A process, whether the target business is based in a high-growth or a developed economy. So treasurers can work with their colleagues in the finance, tax and legal departments to ensure that their company is making a good purchasing decision.
Not only will they look at the cash and funding position of the target business, they will also consider its exposure to FX and commodity risk, and scan its commercial contracts for onerous financial clauses. They will assess the target business’s banking relationships, and the risks associated with them, and review the tax and accounting regulations in the target’s jurisdiction.
Input from treasury is key even when an acquisition is little more than a twinkle in the chief executive’s eye
They will investigate whether a deal will trigger debt buy-back clauses on outstanding bonds issued by the target business, and consider how an acquisition will affect their own company’s credit rating and ability to secure funding in future. They are “flushing out the key issues”, as Mr Stebbings puts it.
“Treasury typically gets involved with an acquisition at the beginning of the due-diligence phase,” says Matt Cornwall, assistant group treasurer of outsourcing giant Capita, which has undertaken 12 acquisitions since May 2013. “We advise on the termination of funding arrangements, the integration of the bank account and cash management structures, foreign-exchange exposures, bonds, guarantees and other banking arrangements,” he says.
Being able to move money in and out of the jurisdiction where the target business is based is a critical consideration. So, as part of the due diligence process, the treasurer will investigate the local payment and regulatory systems in that jurisdiction, including currency controls and withholding tax. “You will hit exchange controls,” predicts Angela Clarke, head of treasury at software provider Misys. “So you will need to find a route out for any cash you gather.”
To make the due-diligence process as effective as possible, the acquirer’s treasury team should work closely with their counterparts in the target business.
“You sit down and look at areas, such as the swap book, the FX book and their treasury policies,” says Peter Matza, engagement director at the Association of Corporate Treasurers and a former treasurer for Germany utility company RWE. “And you ask what policies do you have for managing cash? Where is the money and who is it with? What do your financial exposures look like?
“The amount of detail that is available to an acquiring company will vary according to whether the deal is hostile or not and whether the target business is listed. Due diligence can also be more complicated if the target is based in a less developed market since there may be limited information available.”
The impact of FX movements on the value of the target business matters greatly in an M&A scenario. So treasurers may hedge the FX risk to ensure that the organisation doesn’t end up paying too much.
“If exchange rates shift, the price of an acquisition may change with it,” says Bob Stark, vice president of strategy at treasury software supplier Kyriba. “A 2-3 per cent shift in currency can be really significant in a large acquisition. And the valuation of the company you’re looking to acquire may change over time, based on that company’s own exposure to interest rates, exchange rates and even commodity prices. So it’s not just the purchase price that may vary, it’s also the valuation of the business itself that may vary.”
The day that a deal completes is inevitably busy for treasury, which needs to ensure that the right money is with the right people at the right time. But the hard work doesn’t end there. Next the process of integrating the new business begins.
The acquirer’s first priority is to gain control of the acquired business’s bank accounts in order to get immediate visibility of its cash, which immediately puts treasury in the spotlight. Treasurers will put reporting, particularly cash forecasting, in place as soon as the deal has completed.
“If anything is going financially wrong in a group, one of the earliest indicators is cash absorption and divergence away from cash forecasts,” says Innovia’s Mr Tilston. Treasury can then turn its attention to other operational matters, such as consolidating bank accounts, reviewing hedging programmes, integrating IT systems and restructuring the treasury team to make sure the company is able to make savings following the deal.
Ms Clarke emphasises the importance of reviewing controls and removing any bank account signatories who may have left post-acquisition. She also points out that it’s crucial to ensure that all employees are paid on time. “You don’t want to upset staff members when they have already been through turmoil,” she says.
Engaging with treasury at the start of the M&A process and keeping it closely involved throughout is critical to the success of a deal. It enables the executives to go into the deal with an awareness of the financial and regulatory risks, and means they are less likely to overpay. Integration of the new business is also likely to be smoother as a result.
“Treasurers bring detailed financial information, insight and experience,” Mr Stark concludes. “And they have an opportunity they didn’t use to have. As a result, we’ve seen more efficient, better planned and better structured M&A.”