Mergers and acquisitions are never guaranteed success at any stage of the process. For their part, treasurers will typically face the practicalities of integration and transition, this bringing its own set of challenges. What can be done to avoid the common pitfalls and help optimise immediate and future outcomes?
As businesses increasingly look to mergers and acquisitions (M&As) to drive their growth, treasury will play an increasingly prominent role in the successful completion, integration and, ultimately, value realisation of such transactions.
Dino Nicolaides Managing Director, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory
For this reason, treasury involvement should begin at the earliest stages of M&A due diligence, says Dino Nicolaides, Managing Director, Head of Treasury Advisory UK & Ireland, Redbridge Debt & Treasury Advisory. However, he notes, with treasury typically involved in deal funding, that early call to prepare the ground for unleashing synergies from a merger unfortunately seems all too often to be missed. “With business teams so focused on getting the deal done, treasury sometimes gets pushed to the margins. That’s a mistake.”
Treasury has many interdependencies with functions such as insurance, commodity risk management, tax, finance, and payment teams. While occasionally these fall within the treasury remit, where this is not the case, Nicolaides believes the correct integration decisions can be taken only when consulting these teams. Indeed, he argues, building new systems in isolation will fail to unlock full M&A synergies.
Plan to succeed
For Peter Zmidzinski, a treasury professional with a number of years’ senior international practice under his belt, planning across the board is essential when engaging with M&A. Before founding risk monitoring platform provider SwissMetrics, Zmidzinski’s role as Head of Treasury for aviation services firm Swissport International, saw him involved in a significant number of acquisitions and divestments. For him, the key to success requires the elimination of unpleasant surprises, and he agrees that reaching out across the organisation is essential.
Peter Zmidzinski Founder, SwissMetrics
To help deflect unknowns, his planning required ongoing “but mostly informal” conversations with the various teams involved in M&A. “My aim was always to find out what’s on their radar, and what’s already in their pipeline,” he says.
He explains that it’s important to obtain an early view over basic treasury interests in M&A, such as how deal financing will impact cash positions, and what foreign exchange (FX) risks will be generated. He also says it’s essential to seek early involvement in any due diligence around the acquisition target company.
Ongoing conversations with internal partners not only enable treasury to begin early preparation, but it also gives M&A teams time to think about treasury matters, notes Zmidzinski. And there’s good reason for this.
“I’ve been shown sales purchase agreements [SPAs] at the eleventh hour that were calling for payment by cheque; these had to be amended immediately because we don’t issue cheques in treasury,” he explains. “Treasury should always request early conversations with their M&A teams so we can make the appropriate execution of the sale in good time, without last-minute adjustments. And once we’ve educated other functions as to how treasury works in this process, they begin to think a lot more about us.”
Due diligence
With the M&A team having firmed up an acquisition target, teams from both sides will begin discovery talks. When a deal is agreed, various memoranda and non-disclosure agreements (NDAs) will be despatched and signed by the relevant parties. Up to this point, it’s likely that treasury will have minimal direct involvement. Once the deal is agreed, due diligence begins in earnest for all.
“This is typically a very structured process,” notes Zmidzinski. “We want a lot of information about the company we are acquiring; we’re trying to uncover as many skeletons in their closet as possible, while they try to hide them!”
Basic due diligence checklist
At a strategic level assess:
At an operational level:
Preparing a treasury-specific due diligence checklist is recommended. “It’s an opportunity for us to find out matters such as which banks they use, how many accounts are held, what the team structure looks like, and what its risk exposures are,” he comments.
Having a view across each treasury function exposes differences, enabling the acquiring team to start thinking about what the merged treasury might look like. It also enables assessment of any new risks that may arise from the merger, and an understanding of where best to focus treasury resources once the deal completes.
A key component of the evaluation of shared information draws upon the treasurer’s sector experience. Zmidzinski recalls that Swissport’s familiarity with the aviation sector affords it a deep understanding of how each industry player operates. “We’re then able to use our experience to find the right data so we can benchmark an acquisition target against ourselves and other businesses; it always helps reveal any of those skeletons.”
The hope is for openness and honesty from the outset. However, says Zmidzinski, sometimes treasury needs to apply pressure to obtain the necessary information. “It was always a bit more difficult around working capital and cash-collection data, but as a cash-based business, we needed to know detailed DSO [days sales outstanding] and payment behaviours, but sometimes details were deemed too sensitive to disclose.”
With this data likely only to be revealed post-closure, using the principle that “if you don’t ask, you don’t get”, Zmidzinski found that if treasury pushed harder, sometimes core preparatory information was forthcoming.
As an example, he says that when acquiring, the legal change of control can trigger the annulment of certain financial agreements. “If you don’t question, prepare and plan sufficiently, you could find yourself scrambling around at the last minute for financing or account replacements, when what you need to be doing is ensuring business continuity.”
Post-closure, treasurers may unearth undesirable issues such as details about guarantees – contingent liabilities – that are embedded, badly recorded or that have simply not been disclosed. Treasury needs to report these while managing the underlying risks. As such, at the earliest opportunity, it’s important to seek a list of every risk and guarantee in place, and to be able to quantify and understand what triggers each of those, as they could represent a significant peril.
Where sometimes answers are not immediately forthcoming, it is possible that the M&A team driving the process may become impatient. “Treasury may need to be a little bit ‘commercial’, accepting that we’ll get the information later,” counsels Zmidzinski. “But if we’re missing information that is super-important for us – such as the target company’s position on contingent liabilities or derivatives – we must stress that the risk quantum could be huge, so we must at least know the range we’re dealing with.”
Need for speed
Mergers are fraught with pitfalls, and the most common that Nicolaides sees is the failure to integrate functions quickly enough. “The longer integration is left unaddressed, the more money is left on the table,” he warns. This may not sit well with upstream stakeholders such as investors.
“A slow reaction will often see legacy systems kept for far too long,” notes Nicolaides. “It means maintaining separate reporting packs, with manual- and labour-intensive consolidation processes that can never be fully accurate.” The subsequent lack of visibility across fundamentals such as working capital that this presents is in itself a major risk for any entity.
A delayed decision on the structure of the merged entity has a further damaging effect. “Mergers can create a lot of job uncertainty among staff,” warns Nicolaides. “When this is experienced for an extended period, it has the effect of pushing people to look for new jobs. Delays can easily result in the loss of good human resources.”
Smooth change
The nature of M&A means staff on both sides will have many questions before the merger closes, often regarding their own jobs. Treasury is no different, with concerns typically raised around how the function will be organised post-merger.
When tackling change management, transparency and timeliness are key to announcing any new structure, system and approach, notes Nicolaides. “Strong communication is essential throughout to establish the least possible uncertainty and demotivation among staff,” he continues. “But it’s beneficial when management consult with staff early on in the decision-making stages because employees who have been consulted and listened to are more likely to support those changes as they become reality.”
For Zmidzinski, too, “it’s important to quickly reach out to the teams on the opposite side, to discuss and plan immediate, mid- and longer-term goals”. The immediate treasury aim, he states, is always to ensure business continuity. “At the very least, salary and supplier payments need to continue seamlessly across the acquired business. But it’s important to quickly gauge the mood of treasury and finance personnel, tackling any fears and concerns they may have.”
In a large acquisition with a substantial treasury set-up to consider, he believes that meeting the incoming team in person will help build relationships and gain a deeper understanding of operations. “You also begin to get a good feel for local talent at this point,” he notes. “And no matter what the eventual outcome is, there’s always an opportunity somewhere in the organisation for the right skills, that’s why in Swissport we always tried to create roles to retain the best.”
Methodologies
When seeking M&A synergies, analysis of processes is a key early element of success, says Bob Stark, Global Head of Market Strategy, Kyriba. In a merger that is likely to present significant change –typically seen where a large business is acquired – he says the first action of the treasurer will be to map the combined organisation from a treasury and liquidity process perspective. This enables easier identification of any new conditions that are likely to emerge as the targeted operating model unfolds.
Bob Stark Global Head of Market Strategy, Kyriba
A change in capital structure, for example, where perhaps financing the acquisition required additional sources of liquidity, may make the business significantly more vulnerable to fluctuations in interest rates. The absorption of multiple new bank accounts or currency exposures may add risk and complexity to existing treasury processes.
“Treasury needs to understand the expectations for enterprise liquidity, capital allocation, and risk mitigation to carry out its changed set of responsibilities,” Stark explains. “Each function and process needs to be assessed against the updated vision for treasury and liquidity management.”
It may not always be necessary to integrate every aspect of treasury immediately, or at all in some cases. Indeed, the directional strategy of the merged organisation may dictate that certain business activities will cease or be divested. The treasurer should be part of strategic planning to ensure treasury’s limited integration resources can be appropriately focused.
This will also help treasury create and maintain a roadmap of how the combined entities will evolve. Confirmed timelines and prioritisations covering personnel, structure, governance, and systems will ensure key treasury functions and interdependencies are well managed.
Integration with internal and external systems is another important consideration, as the separate organisations will have managed data and processes in different platforms for treasury, payments, and business intelligence. A good assessment looks at each treasury function against what is required of treasury in the future. Where new integrations are required, the approach might start with bank connectivity as it is critical to ensure that bank reporting and payments are uninterrupted. For Stark, “focusing initial efforts on the most impactful functions for the business will ensure planning efforts drive integration success”.
Acquisition financing at Apex
Over the past four years, global financial services provider Apex Group has successfully completed 21 acquisitions. Marcus Worsley, Group Treasurer, Maxwell Johnston, Head of M&A, and Simon Gatland, Group Financial Controller, reflect on their experiences.
Treasury will work closely with the corporate finance team and the M&A lead at the outset. During the financing discussions, treasury must be involved in projection models and will be playing a crucial role in deciding the appropriate financing facility, based on a variety of factors, such as size of the transaction or leverage profile.
Treasury is essential in ensuring that all facilities are in place, with liquidity available to accommodate the fluid nature of M&A transactions. Furthermore, with cross-border M&A continuing despite restricted travel, treasury plays a key role in advising the board on how, when and what instruments will be used to hedge the transaction once a firm commitment is in place, as well as executing these hedges.
This activity coincides with close liaison with the finance team. Hedges can range from vanilla forwards and option trades through to more complicated structured products to manage the foreign currency exchange risks. In our experience of successfully completing transactions in countries where there are more complex currency capital controls in place, treasury is required to work with its partner banks and local counsel. They will be able to facilitate the foreign exchange and get the appropriate documentation and approvals with the central banks so that the transaction can be settled at the greatest rate achievable to the group.
Treasury also works with company secretarial, finance and tax teams to implement the right legal entity structure, and if a new entity is required, it will be called upon to facilitate the opening of any bank accounts or facilities internally or externally required. In addition to this, treasury is also responsible for the hedging, forecast, and settlement of any future deferred payments or earnouts to the prior sellers.
Once treasury has a full understanding of what the new combined organisation will look like, Stark suggests a review of whether the existing technology stack is sufficiently flexible and adaptable to support treasury’s new responsibilities and business requirements. “Don’t assume that your existing toolkit will be fine just because it suited the old organisation,” he warns.
Indeed, as the direction and needs of the merged business are clarified, Stark says treasury should consider if it has a suitably “composable” treasury system to ensure treasury processes continue to be fully automated. This includes bank connectivity, integration to enterprise resource planners (ERPs), and the evolving network of connected systems that treasury requires to strategically support the business.
Stark further points out that any proposed technology selection should be driven by the new business requirements: “technology is an enabler of change and should never become the focal point of a transformation”. That said, as business integration progresses, he believes that there are many advantages to the adoption of new and emerging technologies in the context of M&A.
Application programming interfaces (APIs) for instance, enable easier connectivity between the core systems, banking platforms, and new data sets of the two businesses. APIs open treasury platforms for later adoption of artificial intelligence (AI), itself facilitating increased automation, improved visibility and control across the combined organisation, and even real-time processing.
Simon Gatland Group Financial Controller, Apex Group
Stark cautions that the incorporation of new people and processes could increase organisational exposure to fraud. This can force an often heightened need post-merger for enhanced governance and compliance processes around core finance functions such as payments.
Many CFOs are demanding additional review of payments enforcing a quarantine and additional review of non-compliant and suspicious payments which, he suggests, build additional resilience against internal and external fraud schemes. Similarly, integration of sanction-list screening can help mitigate potential compliance issues, especially where the acquired business exposes the combined organisation to new clients and territories. These can be short-term measures until functions can be standardised and controlled group-wide.
Post-acquisition integration at Apex
Once the transaction has closed, the job of treasury is not over, note the Apex Group commentators. We then progress to a 60- to 90-day programme of bringing the treasury elements of the newly acquired business into the group’s programme. This will include all banking, cash management, hedging, investments, and risk management.
Alongside this, treasury has responsibility for all working capital with the group, so all of the entity’s billing, credit control, and payments need to be centralised into the main central team that reports to treasury. Doing so often requires staffing changes, adaptation of reporting lines or migration of workloads.
Fundamental initial integration steps include ensuring that cash and working capital are available at the outset after completion, with treasury able to access working capital and extract cash efficiently to ensure the group is maintaining its lowest achievable weighted average cost of capital.
Once we’ve achieved that, treasury has the ability to drive working capital as needed, in order to maintain and improve the cashflow conversion ratio, free cashflow ratio and day sales and day payables outstanding: these are key KPIs and reports that treasury use to manage the group’s liquidity and overall working capital.
Treasury will also work closely with the integration and group finance teams. This is to ensure the internal working capital facilities are in place and the accounting and reporting structure is mapped on to the group’s main enterprise resource planning (ERP) system and accounting ledger.
Over the medium term, the business will be fully integrated into the central billing team, and the main ERP and billing system, along with credit control. The business will concurrently be integrated with the payments and accounts payable (AP) teams, and system-wise on to the group’s vendor management and purchase order (PO) processing systems in conjunction with the ERP. This ensures that the same policies and procedures remain standardised across the group.
Standardisation
An M&A is often driven by the possibility of synergies between the two businesses. One of the most effective ways to leverage these is by standardisation of systems, policies, and procedures across the combined entity. In this context, treasury often presents a perfect opportunity for optimisation.
For companies looking to go on the acquisition trail, thinking ahead in terms of treasury systems is therefore advisable. Having the foresight to implement technology capable of scaling up to meet the needs of a growing business will yield positive results.
“Using Excel spreadsheets or Access databases is not good enough. You have to have a system that you can roll out everywhere it’s needed if you’re taking this route to growth,” says Zmidzinski. Of course, for a treasurer seeking a business case for new core technology, M&A activity may even prove the perfect catalyst for new funding.
Standardisation can facilitate tighter controls, greater operational efficiency, and reduced dependency on individual personnel. However, Nicolaides points out that the decision to take this path should be more nuanced, taking a steer from future strategy. “If the strategy is to eventually divest part of the business, then it might not be prudent to spend time on it. I’d suggest at least running a cost-benefit analysis of process standardisation for every major component.”
KPI advantage
Efficiency assessment should be a continuous process regardless, but, says Nicolaides, once a newly merged treasury function has been set up, a broad sweep of key performance indicators (KPIs) must be established. These should be based on the objectives of the new treasury function, suggests Nicolaides.
KPIs in the context of M&A can be categorised in three ways. The first set, which cover a strategic and risk appetite viewpoint, are commonly used. They should aim to detect whether the new treasury policy is sufficiently effective for the newly merged business. As an example, by measuring FX volatility and noting the degree to which potential losses are mitigated by new policy direction, amendments can be made.
The two other types of KPI, which Nicolaides believes are often overlooked, are nonetheless crucial to successful M&A for treasury. The first measures the operational efficiency of the merged treasury and may, for example, provide a view of how many FX deals are amended, the accuracy of cash forecasts, or even how dormant accounts are managed.
“Useful, but even less commonly deployed among merged treasury, are the qualitative KPIs,” he notes. These can measure the quality of relationships treasury builds with its banks and other key stakeholders. A metric measuring the time it takes for a query to be resolved could, for example, indicate the level of support group treasury offers to its regional counterparts.
Prospects
Recent EY research has found that global M&A activity reached an all-time high in the first six months of 2021. Record M&A volumes have been driven by very supportive macroeconomic conditions, with the lower cost of capital supported by a low interest rate environment. For treasurers, a well-managed series of mergers, with timely interventions, presents a range of opportunities for strengthening operations, and boosting influence across the organisation.
