Drilling Down on Success: M&A in the Oil & Gas Services Sector

A corporate roundtable hosted by HSBC

Panellists

• Melissa Cougle, Group Treasurer, Ensco plc
• OK Azie, Group Treasurer, Baker Hughes Inc.
• Lance Kawaguchi, MD, Global Head – Corporates, Global Liquidity and Cash Management, HSBC
  
  

M&A is critical to many organisations’ growth strategy, not least in the oil and gas industry. As a result, major one-off M&A transactions and/or a larger number of smaller ones is a common challenge for many treasurers. In March 2017, HSBC hosted a flagship event for oil and gas services clients in Houston, USA. The event featured an engaging roundtable discussion, an edited version of which appears below, in which treasurers shared their experiences of M&A, discussing the practical implications of M&A, the challenges, and how to overcome them.

Top Tips: Preparing for M&A Maintain good relationships with key partner banks to preserve access to funding and liquidity, and leverage their experience and new ideas on how best to anticipate and finance M&A; Communicate regularly with the Board and CFO on the group’s financing capacity, including potential impact on debt/ equity ratios, covenants and credit ratings; Maintain robust relationships with credit rating agencies, including communicating regularly on strategy, so both parties understand the impact of M&A on credit ratings; Maintain a register of key information and reporting that is typically required in the case of M&A, including bank accounts, signatories, letters of credit, guarantees etc. and perform regular housekeeping. This avoids delays and additional project risk during M&A integration.

Financing the Acquisition

OK Azie, Baker Hughes
Treasury plays a key role in M&A from the very start, as the company first needs to be able to finance the acquisition. You need strong banking relationships and flexible credit facilities with appropriate capacity, potentially with the opportunity to set up bridge loans. We tend to model our debt capacity every year so we can report to the CFO on our debt capacity for any strategic initiative based on our credit rating metrics.

Melissa Cougle, Ensco
The scope of M&A transactions can vary significantly, and therefore the funding levels required will also vary. Internally, it is important to work with the CFO to stay in tune with M&A strategy as much as possible and use the time before a transaction is announced to explore capital structure alternatives. Externally, developing relationships with your banks is key, so that they better understand your business and you are up to date on access to credit. Equally important, it is essential to assess liquidity levels regularly, not only to meet today’s requirements, but with an eye on the future too. Partner banks have a vital role to play in this, and could have innovative ideas around funding and liquidity that you may not have considered.

Lance Kawaguchi, HSBC
Absolutely. By building strong relationships between treasury and the bank, the relationship manager can serve as an advocate for the customer within the bank. A bank’s credit committee, for example, may not appreciate the difference between an offshore driller, an oil field service company, and a pure exploration and production (E&P) company, which have different risk profiles. The better the bank understands a customer’s business, and the nuances of its risk profile, the more specific the bank’s credit decisions can be.

M&A Integration in Practice 

Once an M&A transaction has concluded, the scale and complexity of the integration process will depend on factors such as the size of the transaction, the degree of similarity in the target company’s business model (e.g. payables and receivables), banking partnerships, account and liquidity models, technology infrastructure, business culture and a wide range of other considerations. The location of the business will also have a bearing on the process.

Lance Kawaguchi, HSBC
An acquisition of a relatively small business with 50-100 bank accounts can be integrated quite quickly, certainly in terms of account structures and controls, but this becomes far more complex in the case of a larger acquisition. Even so, it is important to gain a rapid view of credit agreements, indentures, exposures, hedges, cash balances, etc., to help guide the transition process. Some companies choose to maintain an M&A checklist that covers everything from bank account lists to letters of credit, guarantees, etc., so that information is readily available when required.

OK Azie, Baker Hughes
Bank account and signatory management pose particular risks in the context of M&A. Opening and closing bank accounts needs two signatories in our organisation and must be approved by the treasurer. We have around 1,000 accounts globally, and this typically increases during an M&A event, so maintaining signatory lists is very challenging. When changing a bank account signatory post-acquisition, there are piles of paperwork to sign, which then need to be couriered to the relevant countries, creating cost, delay and the potential for loss or fraud. Then you find out that something different is required, and the whole process starts again.

This can create significant risk during M&A transactions, so treasurers spend a lot of time on administration, rather than the liquidity and risk decisions that result from the transaction. This could prevent you making the salary payment run, settling treasury transactions or making interest payments on debt. That won’t be a comfortable discussion with your CFO.

 

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To help overcome this, we have a quarterly global banking administration process to validate signatories on all bank accounts. Even so, when we conduct an M&A transaction, the acquired or merged entity may have different processes, and often less visibility, so it’s a constant challenge to keep this up to date. This applies particularly when acquiring a business in a market where control mechanisms, e.g. rules on account signatories, are less rigorous than in the United States. Until you can take control of accounts, the balances on these accounts are vulnerable to internal and external fraud, so this needs to happen quickly. Building a common culture, and establishing standard treasury and finance policies and controls is essential in this context.

Lance Kawaguchi, HSBC
Fragmentation and lack of treasury control over accounts has potential operational risk implications. Additionally, treasurers need visibility over and access to cash as soon as possible after an M&A transaction. Achieving a consistent level of visibility and control over accounts can be a considerable challenge. Many businesses are made of a large number of acquisitions, with different enterprise resource planning (ERP) systems, treasury management systems (TMS), as well as multiple banking partners and accounts. It can take time to resolve this fragmentation. For many companies this is an ongoing process, so the housekeeping practice of maintaining key information, such as bank account signatories, is really important.

Melissa Cougle, Ensco
Another challenge with managing bank accounts is the different levels of automation between banks and the way transactions versus administration are handled within a bank. Some banks are advanced in their use of technology, allowing activities with that bank to be brought together electronically through sophisticated integration. When it comes to bank account management, however, this automation seems to disappear, regardless of bank. It would be valuable for the technological innovation we have on the transaction side to be extended into electronic signatory and bank account management. The evolution of biometric technology, for example, could reduce much of the bureaucracy associated with signatories’ proof of identification and offer better controls than the traditionally-used utility bills that are still required by many banks.

Lance Kawaguchi, HSBC
As a bank, we understand that manual processing can be challenging; however, this is changing. We are investing in innovation with technology partners, including areas such as bank account administration, so that our clients’ experience of both transactions and administration is more consistent.

 

Planning for M&A Success Seek to understand each other’s treasury processes and activities as quickly as possible, and ensure they are documented; Work closely with key banking partners to evaluate the best way of rationalising accounts and bank relationships, streamlining connectivity and optimising liquidity. Remember the bank has experience and expertise based on other client engagements that can help to avoid and overcome pitfalls; Leverage the bank’s skills and local expertise to develop a systematic view of regulatory and central bank reporting in each country, and evaluate the liquidity and risk based on potential currency and capital controls; Identify the strengths of both the acquiring and acquired organisations and seek to leverage them when planning the ‘to be’ treasury; Build a clear, detailed, structured plan covering every element of integration, e.g., governance, policies, processes, technology, reporting, banking and organisation, etc., which may be divided across multiple work streams; Ensure there is a mechanism for storing and accessing historic information from both organisations; Recognise that there will be uncertainty on both sides of a merger or acquisition, and establish a process of honest, open communication; Value employees on both sides of a merger or acquisition, develop clear objectives and incentives, and recognise publicly the contribution made by each team and individual.

A People Project

OK Azie, Baker Hughes
I would emphasise that project success is largely based on planning and people. Get the right people in place, which typically involves a cross-functional team, and establish a disciplined approach to project management that reflects the diverse activities and complex interdependencies that exist. In some cases, specific activities may be allocated to different work streams, but there needs to be common focus and commitment to the end goal.

It’s important to look at a transaction from both the perspective of the acquirer and the acquiree. For the acquirer, the transaction is typically seen positively from a strategic standpoint, with the transition process is primarily one of organisation, process and integration. For the acquiree, people are uncertain about the future and fearful of their jobs. It is therefore very important to balance the human element of change with the governance, banking, technology and risk considerations.

Melissa Cougle, Ensco
The uncertainty that OK describes for the acquired business is, in my experience, just as significant for the acquirer. Just because a company is being acquired does not mean its treasury will simply be absorbed or replaced. For example, the acquired business may have a more sophisticated treasury organisation, technology, liquidity structures, etc., even if the business itself is much smaller. Integration of two departments rarely follows a prescribed model in terms of future processes or people.

 

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Whatever the new treasury organisation, it is important to remember that both treasury teams play an equally important role in the success of the integration, and that should be clear and evident in both written and verbal communications. Employees are thinking things such as: “What information will the new business need?”, “How can I, as an individual, make myself as useful as possible in this process?” and “What are the anticipated integration requirements?”. This applies on both sides of the table, but perhaps even more so for acquirees. In many cases, successful M&A transactions hinge on people, how well they work together and their level of motivation. Yes, some people may leave the business, likely from both sides, at the end of the process. But the experience gained will benefit them and their next employer.

When moving into integration mode, it is important to avoid the proverbial ‘analysis paralysis’. While motivation and momentum is greatest at the outset and focus is high on integration activities, decisions should be thorough and thoughtful, but made efficiently. Managers that spend weeks or months trying to decide on the ‘best’ process, system or policy often lose valuable momentum. When decisions are made transparently and efficiently, employees are led to a common vision. After exploratory discussions around the key things that each respective treasury considers a ‘best practice’, treasurers should lay out one path forward that accommodates for broader integration assumptions (for example, the selected ERP), but does not allow for ambiguity within the respective groups.

A different element of uncertainty in a merger or acquisition relates to strategic objectives (both departmental and individual) which can have a major impact on treasury. For the acquiree, this is more obvious perhaps but for the acquirer too, unless an acquisition is a fully planned event, treasury effectively has to stop other projects to manage the integration.

Dealing with the Unfamiliar

Melissa Cougle, Ensco
There are particular challenges when going through an integration where business operations are in countries with which the acquirer is less familiar or does not have operations. Often this geographic diversity is the reason for making the acquisition in the first place of course, but it can pose integration challenges. Not only are there regulatory, tax, payment infrastructure issues to understand and overcome, but cultural, language and time zone differences also play a major part. I’ve observed situations where the headquarters of two companies may have merged well at a corporate level, but in the field, they still effectively operate as different companies, possibly with a new logo on the door. It is important to roll out group-wide processes, systems, etc., wherever possible. Equally, if not more important, is to have the right people in place locally to influence the culture so that it aligns with the broader culture.

OK Azie, Baker Hughes
Acquiring entities in new countries also brings specific issues in terms of understanding the central bank rules, capital and currency controls, and foreign currency risks. Banking partners have a major role in helping to overcome these issues, but in addition, it goes back to the discussion we had earlier about engaging and motivating people locally to share their expertise and experience.

Lance Kawaguchi, HSBC
From experience, engaging your partner bank early can be a major risk mitigation factor. This applies particularly to acquisitions in a country in which you do not currently operate. In these cases, working with an international bank that has a local footprint can ease the process considerably. Gaining access to cash and information is often a big problem. Systems integration can be key to this, and again, the right partner bank can take a major role in achieving this. If the bank has significant ERP and TMS integration expertise, particularly for companies that are moving onto an unfamiliar system, these skills can make a valuable contribution and further reduce project risk.

A related problem that we see is the difficulty in gaining visibility and control over cash where the acquired entity does not have a TMS or ERP, or one that is not integrated with their banking systems either directly or through SWIFT, and uses spreadsheets and fragmented banking systems. In these situations, both cash positioning and forecasting are very difficult until the business has been integrated fully, so a major focus should be on creating a consistent technology environment to overcome this.

OK Azie, Baker Hughes
This is a key point – you need long-term bank relationships, not just bridge loans, bank accounts, liquidity solutions, integration, etc., but also their advice and expertise, particularly bearing in mind that they’ve worked with a variety of other companies who have already faced similar challenges.

M&A Checklist Banks Bank accounts and signatories Liquidity management structures Bank covenants and credit facilities Bank connectivity ERP/ TMS and ancillary systems Regulatory and central bank reporting requirements Governance, e.g., treasury committee Treasury policies Indentures, guarantees, letters of credit, etc. Board and management reporting Global treasury organisation Treasury processes and controls Local treasury activities taking place outside regional/ global treasury centres Integration with shared service centres and other business functions Cash balances and forecasting FX and interest rate exposures, including capital and currency controls Credit risks Hedging strategies

 

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Sharing Best Practices

OK Azie, Baker Hughes
I would emphasise the importance of visibility. You need to understand both the target and acquiring companies’ treasury policies, processes, technology, organisation, banking activities, cash and exposures, etc., as soon as possible. Only then can you outline the end-state before establishing the plan for how to get there.

Melissa Cougle, Ensco
I think taking a project management office (PMO) approach to integration is key, with a structured plan at the right level of granularity. The people aspect of change cannot be underestimated, and should be a focus every day of the integration project. Everyone will be working outside their comfort zone, often in a very uncertain environment, and you need everyone to give their best. Open communication is key to this, both within the treasury department(s), the wider business, and external partners too.

Lance Kawaguchi, HSBC
In addition to these issues, I would note the importance of documenting what you do. You also need to take care when it comes to historic information: if you have a regulatory audit, for example, you’ll need data and documentation that goes back before the time of the M&A transaction. Again, people are critical to this, so that they share what they know, and the information and experience they have become absorbed by the wider team.

Melissa Cougle, Ensco
Absolutely – it doesn’t matter how detailed your integration plan is if you have no-one prepared to execute it.

 

"HSBC launched its dedicated Global Liquidity and Cash Management Natural Resources & Utilities sector approach in 2015. Based on our client’s locations, we created solution and advisory hubs in Houston, Dubai, London, New York, Singapore, and Melbourne, staffed by Industry/Sector bankers with extensive treasury management expertise. We are focused on helping our clients manage the complex regulatory, currency and cultural landscape, whilst providing access to HSBC’s global network, reflecting the local, regional and global ambitions of our clients.” Lance Kawaguchi, MD, Global Head – Corporates, Global Liquidity and Cash Management, HSBC

 

 

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