Oil and Gas M&A in Asia: Interesting Times for Treasury

by David Andrada, Regional Sector Head – Natural Resources & Utilities, Global Liquidity and Cash Management, HSBC

In common with other regions, the decline in oil prices has been a major factor driving extensive M&A activity in Asia. While post-M&A integration planning is clearly desirable anywhere, in Asia the sheer diversity of regulation and business practices adds additional complexity. 

Perhaps unsurprisingly, the upstream oil business in Asia has been heavily impacted by the substantial fall in crude prices. Many capital intensive projects in the region began when oil was above $100 per barrel, but at current price levels are not viable. This has triggered a spate of divestments of assets now considered non-core. According to a report by law firm Eversheds and Mergermarket [1] 56% of Q1 2016 divestment activity was motivated by this. The decline in prices has also severely hit demand for oilfield services, so this is another subsector seeing appreciable M&A activity. 

This rationalisation and streamlining extends beyond just business operations into areas such as corporate treasury. Here, there is now heavy emphasis on reducing working capital requirements and adapting to an environment where financing is far more limited than previously. As the prospect of oil prices remaining lower for longer gathers credence, there is also a growing realisation that quick fixes are insufficient. Making process improvements that will deliver savings in the long term is therefore becoming a greater priority.

The key differences

Nevertheless, achieving these improvements immediately post-M&A is no easy task in Asia. For a multinational acquiring assets in Asia is very different from elsewhere given the multiplicity and probable unfamiliarity of regulations, currencies and business practices. 

Furthermore, much Asian M&A activity currently consists of large non-Asian multinationals acquiring smaller assets in the region. Therefore, the business being acquired typically has treasury operations that are considerably less sophisticated than the acquirer's. Instead of an ERP or treasury management system (TMS), spreadsheets and manual processes are a distinct possibility. Smaller acquisitions will commonly have their primary banking relationships with local banks. 

This poses a number of problems for the treasuries of large multinational acquirers. Apart from the technology mismatch, treasury personnel will be accustomed to very different working practices. Plus, a multinational acquirer is likely to have treasury policy specifying that only a relatively small number of global banks may be used. None of these points is particularly easy to deal with, but there is the additional complication that the acquirer is unlikely to have personnel with the necessary in-depth expertise to address them.

Notes

1. 'Searching for solutions: Energy asset sales in Asia Pacific' June 23, 2016

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Partners and planning

As a result, this is a situation where a combination of a partner bank with global coverage and scrupulous planning can win the day. In this regard, the importance of the extent and granularity of the bank's network cannot be overemphasised: coverage from just a few major centres in Asia will not be sufficient. The nuances that can be lost in translation between someone sitting in Singapore or Hong Kong and someone in Thailand can prove extremely expensive. A bank that can offer first-hand knowledge and presence within each country can prove invaluable in avoiding unpleasant surprises. Blithely insisting that one size can fit all when it comes to treasury is a strategy very unlikely to succeed in Asia.

Before any implementation begins, it is prudent to conduct a thorough survey of the acquiree's current treasury practices. What sort of bank connectivity is in place? How do they handle FX, payments, collections and liquidity management? Then there is also the local financial infrastructure to consider in terms of clearing system functionality, costs and cut offs. This discovery phase will help to inform transition planning that is both appropriate and more likely to be successful. For instance, a major post-acquisition priority for many treasuries will be obtaining visibility of the acquiree's flows, but while global best practice might be to stream data from MT940 bank statements, the banks the acquiree is using may not be connected to SWIFT.

Strategies and tools

Once the decision to integrate financial processes is taken, there are three broad categories of implementation strategy currently being used in Asia:

• Simple integration: effectively just cloning existing processes. This is probably the easiest of the three options and minimises any business impact. Apart from centralised visibility and account mandates, everything continues as before.
  
  
• Simple integration with improvement: similar to simple improvement, but also incorporating quick fixes, such as process alignment. Perhaps also introducing payment initiation and bank statement reporting via SWIFT. Currently this is probably the most commonly used integration strategy employed in Asia.
  
  
• Lift and shift: complete transformation. Ultimately the most desirable end state for many multinationals, but typically the most complex and costly option. Also has broader implications such as tax and optimum choice of incorporation structure. Not much in evidence in Asia at present, as the current environment makes it difficult to cost-justify to the boardroom.

The right choice and implementation of strategy depends heavily upon the early involvement of corporate treasury and banking partner; this point is increasingly appreciated at the most senior management levels. Another important potential success factor is the availability of cloud based treasury systems. These can be extremely valuable as an interim solution for M&A integration, as they incur none of the capital and risk overheads of a major ERP or TMS implementation, while providing similar functionality and a far shorter timeline. The best cloud treasury solutions also support multiple connectivity options.

Conclusion

All the signs are that Asian oil and gas M&A activity is likely to remain strong for the foreseeable future. Even for the largest multinationals, this may create a resource stretch for their treasuries. Support from a suitably qualified bank can help in alleviating this burden, as well as mitigating any issues around time zone differences. But in Asia, the core point remains access to local experience and expertise. Combining that with early treasury involvement and careful planning will significantly increase the chances of a successful outcome.