Strategic Treasury

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Growth Path to EMEA Companies considering entering EMEA recognise the opportunities it offers. However, they must also be realistic about some of the challenges it presents.

Growth Path to EMEA

Growth Path to EMEA

by Lesley White, Head of Global Commercial Banking International, Bank of America Merrill Lynch and Paul Taylor, Head of Sales EMEA, Global Transaction Services, Bank of America Merrill Lynch

Corporates looking to expand abroad need a strategic approach before embarking on an international growth path. As well as generating revenue growth, a presence in multiple markets outside their home market enables companies to reduce their country risk by insulating themselves against economic challenges through a diversified base of both local and global clients.

For many US large and mid market corporates EMEA, which is comprised not only of European Union (EU) countries in Western Europe and Central and Eastern European (CEE) but also other non-EU CEE countries and countries in the regions of the Middle East and North Africa (MENA) and sub-Saharan Africa, is an attractive growth opportunity.

While the Eurozone debt crisis continues to create uncertainty, it is important to remember that Western Europe remains one of the most prosperous and stable trading blocs in the world and most countries in the region continue to recover economically. The other regions that comprise EMEA also offer compelling investment propositions, especially for companies in specific industries or sectors. For example, some countries in CEE have established strong reputations as relatively low cost manufacturing and service locations (compared to Western Europe) and have a highly educated workforce, a transparent legal environment and robust transport and other infrastructure.

This combination of a mature, but still untapped market (relative to the US) in much of the EU, with the emerging markets of CEE, MENA and sub-Saharan Africa, makes EMEA unique. However, while the EU offers the ability to do cross-border business relatively easily because of clear and harmonised regulatory, legal and tax environments, EMEA overall is still a highly diverse region.

Preparation for entering EMEA

Companies expanding into EMEA, either organically or through mergers and acquisitions (M&A), should consider their approach before entering the region. Firstly, they should review which markets they want to initially target, which is an operational decision. As described above, while it is feasible to enter multiple EU markets from a single EU member state, differences in market characteristics or the language spoken mean it must be carefully planned. In other EMEA markets, market selection is even more important given their greater diversity.

Having decided on the most suitable markets, a company should consider its operational and treasury strategy. Some companies make the mistake of thinking what works in their home market will work abroad. However, companies must consider the local customs, work force, legal and tax environments. Instead, it may be more advisable for companies to use the opportunity afforded by expansion to reassess existing treasury strategy. Critical questions that need to be addressed as part of this reassessment include: How centralised or decentralised are existing entities? Does this organisational structure meet the company’s operational and treasury objectives? Similarly, treasury should consider how applicable existing strategies, processes and policies – with regard to risk management, foreign exchange (FX) or inter-company lending, for example – are to the new market the company is entering.

Specific market-related issues that should be considered when expanding into a new country include: a country’s tax, legal and regulatory environment and its payments and receivables instruments and practices, including clearing. The company must perform a detailed analysis and work out the implications of these country characteristics for its day-to-day operations as well as its ability to achieve its strategic objectives.

Corporates also need to think about their staffing requirements in order to implement an appropriate cash management and treasury structure and the availability (and cost) of necessary expertise. Between the company’s home market and its new target market companies need to establish a plan for how these can be navigated and accommodated.

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