by HSBC
In comparison with regions such as Europe, the Natural Resources and Utilities (NRU) sector in the US has been a hive of M&A activity. Outbound deals have been aided by a strong dollar, while apparently domestic activity has actually often also involved the acquisition of global assets outside the US. Another strong US M&A theme has been NRU companies acquiring upstream shale assets, which contributed to 45% of deals in the upstream segment in the second quarter of 2016. From a treasury perspective, these trends have had various challenging implications, including the need to manage new regions, types of business and currencies.
Plenty happening
North America was the leading region for M&A across the NRU sector during H1 2016 [1]. Seventy-two out of 136 upstream deals (representing 45% of total value) involved assets located in the US, with Canada in second place on 29 deals (worth 21% of total value). Midstream deals have also been dominated by the US and Canada, while nine of the 11 downstream deals in 2015 were in the US and the largest by value in Canada.
US NRU companies have also enjoyed the advantage of a strong dollar when making acquisitions outside the US. Since the downturn in oil and natural gas prices started more than two years ago, there is no shortage of distressed assets available for such acquisition. This is reflected in the statistic that there have been a number of NRU bankruptcy filings around the globe during 2016, with more expected to follow.
The US has also seen an appreciable amount of nominally domestic acquisition, where both parties are US-headquartered, but where the bulk of the assets actually being acquired are distributed globally. However, in view of the reduced appetite of some of the banks that have historically funded larger mergers, a more commonplace activity - especially among oilfield services companies - is smaller-scale consolidation, with companies cherry picking assets more for bolt-on acquisition. The intention is that this sort of acquisition will make the acquirer more competitive as the current down cycle shifts into growth.
US oilfield services companies have also been acquiring technology assets. This is a reflection of continuing low oil prices, which is driving a need to reduce the production costs for upstream assets that will otherwise be uncompetitive in comparison with some major Middle Eastern producers. Examples of these also include technology companies expert in areas such as video and geological analysis that can reduce exploration costs.
Treasury strategies
Unfamiliar territory
US NRU treasuries face broadly similar challenges to NRU treasuries elsewhere, but there are some unique points of emphasis. The strength of the US dollar is encouraging international acquisition in addition to the global assets acquired through domestic takeover mentioned earlier. As a result, there is an increasing likelihood that US NRU treasuries will have to deal with acquired assets in unfamiliar countries, plus contend with similarly unfamiliar currencies, business practices and regulation.
Dealing efficiently with this type of situation is considerably easier if the treasury can depend upon the support of a banking partner with a global network and commensurate experience and expertise. This can smooth the post-acquisition path considerably, particularly with regard to matters such as cash visibility, liquidity management and de-risking acquired bank relationships.
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Cash visibility and liquidity
Obtaining visibility and control of the acquired entity's cash and bank accounts as quickly as possible is critical for a number of reasons. Probably the most obvious is operational risk. Authorised signatories may be leaving post-acquisition and if they are not replaced in time, serious disruption can result. There are also more generic fraud and control risks to consider, plus of course treasury policy compliance.
Apart from these operational risks, cash visibility is also essential for identifying any accessible pockets of surplus liquidity within the acquired entity. The acquiring entity will have either assumed debt or used existing internal liquidity (or both) to fund the acquisition and it is therefore imperative to pay down debt as quickly as possible and/or restore a previously cash-positive position.
Cloud-based treasury management systems can prove invaluable here, as the best of them will already have built in connectivity to myriad ERP, accounting and treasury systems. Particularly where an experienced primary banking partner is involved, these systems can provide a very quick interim route to cash visibility and in some cases may be also be appropriate for more permanent adoption.
The information that can be derived from such systems is integral to effective liquidity management. It will quickly become apparent which liquidity from within the acquired business can be centralised with existing corporate liquidity and which needs to be retained within the business for day to day working capital.
A useful additional source of working capital alleviation post-acquisition is the merging of procurement card programmes. These programmes are increasingly commonplace in the NRU sector and apart from their individual cash flow benefits, attractive rebates are available in the market based on total spend. Hence the added value of merging programmes wherever possible.
Banking relationships and treasury models
As mentioned earlier, the strength of the US dollar makes overseas acquisitions increasingly cost-effective for US NRU companies, increasing the chances that their corporate treasuries will have to cope with unfamiliar currencies, business practices and regulation. In addition, there is the question of how to handle the existing banking relationships of any acquired entity post-acquisition. In some regions, there is a reasonable likelihood that these banks may not satisfy the credit criteria of the acquirer's corporate treasury policy or risk appetite more generally. In view of the time it will take to transition bank accounts to a new provider and for the acquired entity's customers to update their vendor list bank details, some form of short-term remedy may be required. One possibility is to enable automated sweeps of all funds above a certain level to one of the acquirer's existing relationship banks.
In the longer term, it may be advisable to consolidate all the accounts and cash/liquidity business with an existing cash management bank. However, some form of post-acquisition review of banking arrangements may be advisable, as the changed corporate structure might warrant an additional banking partner for contingency, lending, or other reasons.
The current protracted down cycle in oil and commodity prices already warrants a re-evaluation of existing NRU treasury models. However, this need for review becomes even more pressing post-M&A, as there may have been major changes in liquidity, funding needs, currency mix, tax structure and geographical coverage, plus many other factors. There is also the consideration that the combined organisation now has dual treasuries, policies/process and costs. Rationalising this situation is important for cost and operational risk reasons, but needs careful planning and execution to ensure success. Again, this is an area where a suitably qualified banking partner can provide invaluable support.
Conclusion
US NRU companies currently benefit from US dollar strength that reduces the effective cost of overseas acquisitions at a time when a large number of distressed NRU assets are available. However, the challenge for US NRU treasuries (in addition to the generic challenges applicable to many NRU treasuries elsewhere) is the unfamiliarity of the environment in which some of these potential acquisitions operate. In this situation, being able to count upon a global network bank that can support any integration, irrespective of time zone and geography, can represent the difference between success and failure.
