Published: January 01, 2000
Many companies may be considering looking into merger and acquisitions (M&A) opportunities as a means of using excess cash to fulfil strategic objectives. However, acquisitions do not always deliver the expected benefits. By bringing the treasurer into the M&A conversation at an earlier point, companies may be better positioned to integrate the new business successfully and benefit from potential synergies.
A number of factors are driving M&A activity in the current market. For one thing, corporations may have record long cash positions on their balance sheets following a cautious outlook and a lack of M&A activity over the last few years. For another, the cost of debt in the market is currently very low, meaning that companies can tap into attractive prices when funding acquisitions.
By bringing the treasurer into the M&A conversation at an earlier point, companies may be better positioned to integrate the new business successfully and benefit from potential synergies.
Meanwhile, a significant amount of consolidation is taking place in certain segments such as pharmaceuticals. A further driver is the rise of ‘inversion deals’, where large US corporations are looking to acquire European companies to re-headquarter themselves in Europe, thereby benefiting from a more favourable taxation environment.
Many companies are currently looking to embark upon M&A activity – but in order to deliver the desired benefits, companies must not only obtain the necessary funding but must also successfully integrate the newly acquired company into the existing business.
The M&A process incorporates several different parts of the organisation. The strategic discussion takes place at the C-suite level, whereas planning and execution tends to be carried out by controllers, accounts payable staff and cash managers. Forming a link between the different ends of the spectrum, the treasurer tends to play a role in two major elements of the acquisition process: the funding and settlement of the deal, and planning the integration of the target into the existing business.
The treasurer’s primary role in the acquisition process is often seen as arranging funding for the acquisition – but this is not the whole story. Treasurers also have an important part to play in integrating the merged businesses. This process includes defining a strategy for the combined treasury, overseeing the integration period, harmonising technology platforms and optimising the treasury workflow.
Ideally, the treasurer should start thinking about the integration process while the deal itself is still in the early stages – but in many cases, the treasurer is not brought into the M&A discussion until the deal is nearing the point of execution.
This may not be the best approach. Integrating an acquisition can be a challenging undertaking which requires significant planning. If treasurers are not involved in the M&A conversation at an early stage, there is a very real risk that the integration project will not deliver the expected benefits. For example, combining the two companies’ IT infrastructures is challenging even if both companies are running the same SAP system. If the acquiring company and the target run different enterprise resource planning (ERP) systems, combining the two is likely to involve a sizeable IT project with resourcing, cost and timing implications.
While there may be strategic reasons for an acquisition, such as diversifying the company’s strategic focus, a major part of the project will be to gain efficiencies within the two organisations, simplify the infrastructure and reduce costs. It is here that the treasurer’s input can be invaluable. Early in the acquisition process, the treasurer may be able to advise the C-suite on realistic timelines to integrate the new business – and on the back of the integration, where the synergies of the two companies coming together may be found.
From the treasurer’s point of view, the planning process will start with gaining an understanding of the target IT infrastructure. Other key considerations will include integrating the two companies’ bank accounts and cash management processes. Treasurers can also look at the proposed settlement process at an earlier point in the proceedings in order to advise on potential structures and the use of escrow to help facilitate the deal.[[[PAGE]]]
Increasingly, escrow is being used in the M&A process in a number of different ways. Standard approaches include the use of escrow to support the settlement of cross-border transactions. Holdback escrow is another well-known model. In some cases, an amount of cash may need to be held back in the settlement process based on certain conditions – for example, a stipulation that the management team will remain in place for an agreed period following the acquisition. The escrow will then be released once the conditions had been fulfilled.
Other more recent applications of escrow include the escrow bridge facility, a niche offering which can be used when a sub-investment grade company is looking to fund an acquisition by arranging a loan secured against the assets of the target company.
There is also growing interest in the use of escrow as an alternative to a standby letter of credit (SBLC). The cost of an SBLC can be significant – but this cost can be reduced if cash is put into escrow instead, giving the buyer an exclusivity period which allows it to complete the deal without competition from other potential buyers. Following the acquisition, both parties provide joint notice to remit funds to the buyer and the escrow is then returned.
Typically companies are looking for a bank that can help them cut through the complexities involved in the M&A process at many different levels. Where the settlement process is concerned, the treasurer needs to feel comfortable that the escrow agent whose role is to mitigate risk will be able to manage the flows in a timely manner. Experience is key in this regard; only a handful of banks have the capabilities to put an escrow arrangement in place in short time frames. The stakes for M&A transactions can be very high, particularly where large sums are flowing across different markets. Companies need a bank that has the right controls in place to track the relevant flows throughout the settlement process.
Companies should undertake their research carefully in to which bank they select to provide the escrow services.
Companies should undertake their research carefully in to which bank they select to provide the escrow services. The financial stability of that organisation is paramount.
Where post-close integration is concerned, few banks are prepared to engage with treasurers proactively and support treasurers in this process. For many banks, the investment banking and transaction banking businesses are managed separately. This is understandable because the two businesses operate in fundamentally different ways: the investment banking business focuses on individual transactions and one-off deals, whereas transaction banking focuses on sustainable relationships and long-term repeat business.
As such, many banks run and measure these areas differently: investment bankers, for example, do not tend to be measured on what they do to drive the transaction banking business within the bank. Banks which have combined these areas may be in a better position to advise and support treasurers during the integration planning process.
In some cases, it may be appropriate to outsource the target treasury structure, either temporarily or on a longer-term basis. This can support the acquisition in different ways: firstly by providing early access to visibility and control of the banking infrastructure at the acquired company, and also by applying the acquiring company’s policies, processes and procedures to the acquired assets.
Further down the line, the company may decide to take the acquired business in-house and integrate it into its existing structure – or if everything is working well, they may decide to retain the outsourced arrangement.
Again, few banks currently offer this service because they may look at outsourcing on a standalone basis and margins tend to be low. However, if seen in the context of the wider client relationship, outsourcing can be a valuable offering which strengthens the relationship between the bank and the corporation.
As companies embark upon M&A deals, they may want to consider not only the strategic benefits of the deal, but also the synergies which may be dependent upon a streamlined post-close integration exercise. All too often the involvement of the treasurer comes later – but by taking a more proactive role in the M&A process, and seeking out the most suitable solutions from their banks, treasurers can advise on everything from the settlement process to the IT integration project. As a result, companies will be better placed to hit the ground running once a deal has been executed.
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