Head2Head: Maximising the Value of ‘MADS’ Transactions
by Bruce Meuli, Global Business Solutions Executive, and Jonathon Traer-Clark, Head of Strategy, Global Transaction Services at Bank of America Merrill Lynch
In this edition, Bruce and Jonathon discuss M&A, together with divestments and spin-offs. As the volume of M&A activities grows, this will become a more important issue for treasurers on both sides of these transactions.
JTC When you ask anyone in transaction services about their M&A experience, long days and short nights come to mind for most. Over the past six months at least, you only have to glance at the headlines to know that global deal flow is on the up. But from a treasurer’s perspective, it’s not just mergers and acquisitions that are worth discussing: Divestitures and spin-offs (collectively ‘MADS’) also have major implications for treasurers, so they need to be involved in these transactions.
BM At the heart of the MADS debate is how the corporate treasurer can prepare for change, and leverage the opportunity that it presents. To be successful in this, the treasurer needs to be in the driving seat as early as possible. All too often, treasurers get pulled onto the deal team too late, putting them in situations where they have to execute on a number of issues – funding, risk, due diligence to name but a few – at a moment’s notice. For large corporates that evaluate and process multiple targets simultaneously – what I would call ‘serial acquirers’ – putting standard processes in place so the organisation can align activities for one transaction and across transactions is critical. This means looking at all the strategic implications of a deal from a financing, charges, liquidity and assets perspective. It involves engagement with legal, tax and others too.
JTC That’s the right concept in theory, but it ultimately depends on how institutionalised the corporate finance development cycle is. The typical involvement of the treasurer usually depends on the size and transaction frequency of the business – maturity if you prefer. A dedicated department running integration processes is only necessary if MADS are part of your DNA and a continuous cycle. I’d argue that engaging the treasury department at the right time is a balance of confidentiality (need to know) and financial readiness. It is treasury’s job to help finalise and then integrate transactions, not necessarily to scout for them – that’s up to corporate finance and strategy, except of course, where treasury is also responsible for corporate finance. Naturally, the size of the organisation plays a part and at smaller companies, treasury is likely to be involved earlier. So for me, engaging in MADS discussions at the right time, depending on the organisation and transaction size is what matters.
BM It is important we don’t overlook how treasurers can manage an acquisition of their own company. As every good business has an exit strategy, looking over both sides of the deal wall is essential. Best practice is rooted in transparency and cooperation. If you are being acquired, giving control and access to the new management is sometimes a difficult but necessary action to take.
Where the two treasuries are of comparable size and sophistication, it cannot automatically be assumed that the acquiring treasury department should become the treasury function, together with its existing treasury organisation, people, processes and systems for the combined group. While in some cases, this may be the case, the opposite may also apply. The wider business organisation will also impact on these plans: it may be that separate treasuries will continue to operate, or that one becomes a regional treasury centre for the other.
JTC At the end of the day, from the perspective of both the target and acquiring company, understanding the business and the role treasury plays within a new structure will drive the eventual success of any integration. Let’s not forget that the deal and integration teams are often distinct silos, with treasury frequently taking a greater role in the latter. As the timing of transactions are often opportunistic – even sometimes driven by balance sheet capital restructuring – the first 30 to 90 days are about taking stock, and gaining visibility and control. Moving beyond the purchase, treasurers must address technology, support structures, facilities, bank relationships, legal/tax structures, connected systems and people – to name but a few.
Both sides of the deal table play a critical role as each can contribute valuable insight about the necessary investment required to streamline technological, structural and operational processes. I’ve seen many mid-range growth companies trip up by not dedicating time and investing in planning early on. For example, running multiple ERPs with over 100 partner banks is more common than you might think, but certainly not best practice.
BM Yes, and the long days and short nights often continue beyond a transaction’s close. If treasurers are willing to seek external advice and support then this period can become much easier. A treasurer’s global bank relationship and shared service centres soon become critical, particularly for smaller-sized corporates that are less likely to use treasury as a financial and strategic, not just operational function. All this helps to overcome what can be a ‘mad’ process.
The TMI Verdict - by Helen Sanders, Editor
M&A, or ‘MADS’ as Jonathan and Bruce have coined, is an important but often overlooked topic. The obvious outcome that the acquiring business will simply absorb the treasury function of the target is rarely as straightforward in practice. In reality, there have been multiple situations where effectively a ‘reverse takeover’ takes place from a treasury perspective; alternatively, the people, processes and systems of the target often add considerable value to the acquiring business, so many of these are retained in order to use an M&A transaction as an opportunity to deliver treasury improvement.
Jonathan raises an important point when noting the impact of divestments and spin-offs. While the new treasury function may be able to rely on the use of systems, transactional capability and reporting for a defined period after the transaction, there is a critical window of opportunity in which to consider the optimal treasury organisation, banking relationships, cash and liquidity structures and systems infrastructure and processes. Similarly, for the divesting entity, the potential reduction in complexity may also be an opportunity to review and revise the internal and external structures in place so that ultimately, both businesses maximise the value of the transaction.