Maximising Value in Technology, Media and Telecommunications M&A: Involve Your Treasury and Transaction Bank

 

By Sacha Deal, Global Sector Head and Vivek Anand, Regional Sales Sector Head, Asia Pacific – Technology, Media and Telecommunication, Global Liquidity and Cash Management, HSBC

  

The rapid growth in M&A activity across the technology, media and telecommunication (TMT) industry brings with it material post-merger activities that are time consuming, often cumbersome and involve multiple stakeholders. Nevertheless, although the integration phase of a deal seldom grabs headlines, it is a primary factor in determining the success, or otherwise, of the deal’s outcome. Sacha Deal, Global Sector Head and Vivek Anand, Regional Sales Sector Head, Asia Pacific – Technology, Media and Telecommunication, Global Liquidity and Cash Management at HSBC explain how the early involvement of a corporation’s treasury and cash management bank can have a highly positive effect on the integration phase and therefore also on the speed at which value is unlocked by the M&A deal as a whole. 

M&A deal teams are traditionally kept small for a variety of reasons and the treasury function may not be involved until a deal is well advanced. The challenge with this approach is that it is likely that those who are involved in M&A discussions may have limited understanding of the treasury and cash management implications of the transaction. 

As a result, once treasury is engaged, it often finds itself in a fire fighting situation to ensure rationalisation of systems and processes, bank accounts and interfaces. For example, conflicting Enterprise Resource Planning (ERP) and treasury systems can result in unnecessary duplication of effort and personnel, plus the cost of missed opportunities for automation and process improvement. 

Involving treasury as early as possible in M&A discussions can help to minimise these risks. While other members of the M&A team can focus on strategic considerations, treasury can focus on the practical details in order to deliver the smoothest possible operational transition. 

Furthermore, apart from day to day matters, treasury is also best placed to spot other financial risks, such as hidden liabilities on hedging transactions [1]. 

TMT specifics 

Whilst involving treasury early in the M&A process can improve the operational transition, the degree of improvement will also depend on the empowerment of treasury and their collaboration with their transaction banking partner. In some sectors, such as Natural Resources and Utilities, M&A activity is almost a way of life for many treasuries – so they have a legacy of experience of the transition best practices. This experience isn’t as prevalent for all TMT treasuries. The recent growth in convergence across the TMT sector creates additional complexities given acquisition of new business models and sector dynamics. 

A telecoms treasury will have a deep understanding of the likely financial processes and structures of another telecoms company, but perhaps not of a fintech or content provider. For instance, working capital drivers such as terms of trade and metrics such as days payable and days sales outstanding (DPO and DSO) may be entirely different. 

Another recent trend in TMT M&A has been an increase in cross-border activity. The treasury of a European TMT company may have a strong grasp of the issues facing a European business, but what happens if the company starts acquiring assets in completely unfamiliar countries in Asia, each with their own particular regulation and business practices? 

An experienced transaction bank can provide expertise in support of corporate treasury in the M&A process leveraging its trans-industry and global expertise. Detailed working knowledge of typical financial processes, banking solutions, working capital cycles and local nuances of doing business in multiple jurisdictions can provide critical insight. 

In some situations a suitable bank can play a crucial role in keeping vital information flowing between the target and acquirer’s treasury. Situations can and do arise where Chinese walls between the two organisations, such as in relation to physical accounts that form part of the acquisition, can cause virtual stasis. A trusted bank can act as a valuable intermediary here by obtaining dispensation from the target to share information with the acquirer and ensure business-as-usual processes can continue on the day the transaction closes. 

An innovative transaction bank will take this intermediary role a step further by organising workshops with the treasurers of both target and acquirer. This can be invaluable in highlighting key issues to be addressed upfront as integration planning develops. 

Pre-signing

Working capital and liquidity

So how can treasury add value to the M&A process before a deal is even signed? One of the most fundamental considerations is working capital. Will sufficient working capital be available to the right entity  and in the right location? If so, are there any obstacles such as local regulation that might impede dealing success?

Cash forecasting is critical here and should initially be undertaken as early as practical in the process and revisited in the lead up to deal completion.

 

Notes 
[1] Clearly M&A activity is a sensitive matter and corporates will be guided by their own policies and procedures, and local regulation as to who to involve.

 

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A working dialogue with the treasurer or finance director of the entity being acquired  should complement usual representations and warranties in the Sale and Purchase agreement to ease completion formalities.   

Other key pre-merger tasks for treasury include checking how the target’s cash flow, bank accounts and signatory structures will map into those of the acquirer. Are there opportunities for cost savings through bank account rationalisation? If existing bank accounts are to be retained, what arrangements will be required to amend signatories without causing disruption? Are there countries where the combined entity might experience significant cash surpluses or deficits? And how might respective payment and collection policies affect this now and in the future? Is there scope for changing those policies to improve the working capital position? And how might all these  considerations apply regionally and globally as well? If external funding sources are currently available to the target, will the acquirer’s financial strength post-M&A be sufficient  to ensure that this funding is still available, or will new sources be required?

Related considerations are how any excess cash can actually be mobilised. Some may be in jurisdictions where the cash is effectively trapped due to currency controls or other local regulation. If so, there may still be opportunities for cash concentration or intercompany lending at a local level. More generally, the target’s existing liquidity management arrangements should be examined to see how these might be combined with those of the acquirer. And, an increasingly important consideration is understanding  and addressing in advance KYC requirements across banking partners to avoid disruption. 

Investments and hedging 

Assuming there will be a degree of net cash post-merger, the next task will be to check the target’s investment guidelines. Are they acceptable to the acquirer or will they need amending? Do they involve unacceptable risks which need to be addressed immediately post-merger? The matter of counterparty acceptability applies in other areas as well. Does the target have any banking relationships that are unacceptable under the acquirer’s counterparty credit policy for transaction banking, deposits and hedging transactions? If so, how might these be unwound? 

In the case of hedging, apart from the counterparties involved, other considerations include the relative match of the target’s FX and interest rate hedging policy with the acquirer’s, such as permissible instruments and exposures. The obvious corollary to this is checking any open hedging positions the target currently holds, their current valuation and any unexpected liabilities. 

Technology 

The technology match between acquirer and target and any integration work required is critical to the success of any M&A transaction. It is highly unlikely that both entities will be using identical ERP and treasury systems, so an estimate of the costs and time of transitioning the acquisition technologically is essential. While it may not be feasible at this stage for treasury to develop a detailed project plan in view of all the other everyday demands upon on it, this is an area where a banking partner can provide invaluable assistance. 

Particularly with multi country M&A, a bank with certified ERP and treasury management system specialists available on the ground in the countries concerned will be able to offer detailed practical assistance on the best route forward. This might include a phased project plan over staged time horizons that prioritise the most urgent transitioning tasks at each stage. A bank with deep and wide experience in this field may also have already developed some or all of the necessary interfaces or middleware needed to import/export data across diverse systems. 

During the merger 

Developing and documenting a clear integration plan with key milestones documented across items including legal entity structures, bank accounts, payments processes and signatories as well as liquidity and hedging policies is critical. Particularly for cross-border M&A entering into new jurisdictions, understanding regulatory hurdles such as currency controls and banking industry nuances is a key area in which an experienced transaction bank can provide timely insight and guidance. 

Post-merger 

Post-merger, treasury must be empowered to swiftly execute the steps agreed in the planning phase and this is where detailed preparation immediately adds value. If the detailed level preparation for matters such as updating KYC, amending signatories and access to systems pays off, business continuity should be unaffected. This reduces instances of resource constraining firefighting and enables treasury to focus on executing the strategic aspects of the integration and process improvements such as bank account rationalisation, enhanced liquidity management and payables/receivables infrastructure development leveraging newly acquired economies of scale. This may also encompass maximising legal and tax efficiencies through account optimisation and liquidity structures. 

 

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It is worth bearing in mind during this post-merger phase (and to some extent also during the merger), a measure of caution may be advisable when streamlining transaction services. If existing accounts and facilities are closed too soon, appreciable cash flow disruption can occur. A classic example of this is when customers simply ignore the first few notifications that bank details have changed and persist in paying to the old account. If the old bank account is held with a bank that does not satisfy the acquirer’s counterparty credit policy, then the account can still be left open and a daily sweep to the company’s lead transaction bank can be established. 

Foreign acquisitions: FX and interest rate risks 

As cross-border acquisitions in the TMT sector become prevalent, considerations around currency, who bears the FX risk and how is this mitigated are fundamental questions for treasury to own upfront. The nature of these risks change during the transaction life cycle and hedging strategies should evolve as levels of confidence in the transaction reaching completion increase. Interest rate risk is equally important as the funding structure and pro forma capital structure of the combined company take shape. 

Consider a US company contemplating a European acquisition. While the company may have a view on acquisition price, it cannot be certain of USD/EUR conversion rate until the deal completes. Between initial bid, deal announcement and closing, the buyer has FX risk to assess and mitigate. A clear treasury policy across transaction and translation risk will facilitate how hedging is implemented upon close, however, the policy may need to be reassessed depending upon the materiality of the acquisition. For interest rates, a similar set of morphing risks apply throughout the transaction lifecycle. These will also vary depending upon the funding structure chosen for the deal (i.e. the mix of equity, term loans, bridging loans and bond issuance) and how that interacts with changes in interest rates. 

Early treasury involvement: to whom does it matter and why? 

The M&A deal team, the company’s board and even third party advisers should all champion the involvement of treasury in M&A discussions at an early stage. 

The board will have guided the market on synergies to be delivered through the transaction and costs to be incurred to realise these. Outperformance against both metrics will generate significant incremental value from shareholders and analysts and build credibility for future M&A. 

If treasury is not involved, or involved too late, the significant value treasury can contribute may not be achieved. Excess and unnecessary cost, business continuity disruption, technology conflicts and process duplication are just some of the examples of value erosion that will likely occur. 

Conclusion 

Treasury is the natural owner of the granular operational aspects that will have a major impact on a transaction’s success. However, the fact remains that most treasuries still tend to be regarded within the corporation as cost centres and are therefore often thinly resourced. The right transaction bank can not only support treasury in its due diligence by sharing its global and cross-industry expertise, it will also have specialist resources in areas such as ERP and treasury management systems that it can deploy. 

Utilising a long standing trusted advisor in a strategic banking partner will provide treasury and other stakeholders with timely and best advice on minimising risk and maximising efficiency opportunities throughout the M&A life cycle.