The Implications of Global M&A for Corporate Treasury Teams
by Lance Kawaguchi, Managing Director, Global Head - Corporates, Global Liquidity and Cash Management, HSBC
Despite a slight slowdown in 2015 versus 2014, M&A activity in the natural resources and utilities sector is still running at exceptional levels. Looking ahead, there is expectation in the industry that these activity levels will continue to increase over the next few years. This inevitably raises considerable challenges in terms of post-M&A corporate treasury reorganisation, for both acquirers and disposers of assets. Lance Kawaguchi, Managing Director, Global Head - Corporates, Global Liquidity and Cash Management at HSBC examines these challenges and how best they can be addressed.
While M&A presents opportunity, it also begets substantial workload for corporate treasury. Potentially hundreds of bank accounts have to be opened and closed, data from differing ERP and treasury systems have to be consolidated/normalised, numerous authorised signatories have to be changed, liquidity structures need to be revised: these are just some of the adjustments that are required post M&A.
The long history of M&A activity in the Natural Resources and Utilities sector means that most participants are well aware of this workload. Nevertheless, while they may plan and budget accordingly, it is still a painful challenge that must be overcome - especially if there has been an accumulation of legacy systems from earlier M&A activity.
In common with many other sectors, Natural Resources and Utility treasuries typically have very low headcount. Even if additional M&A integration budget has been allocated, there will therefore still be considerable pressure on treasury personnel who will have to on-board the acquisition in addition to their existing day to day workload. A similar situation applies to the treasury of the company disposing of the asset. For instance, the bank accounts of disposed assets may have been integral to a liquidity structure that will now require revision.
This combination of high integration workload and limited treasury personnel leads many corporations to look to their banking partners for solutions and assistance. One popular approach is ‘lift and shift’, whereby processes and bank relationships are aligned with the existing global or regional bank that is already servicing the acquiring entity. If the acquirer’s existing treasury processes are already efficient and highly automated, then this is probably the ideal approach. However, in order for it to work effectively, much will depend upon the capabilities and resources of the acquirer’s bank. As a minimum, they should be able to match (or better still exceed) the functionality already available to the acquired business. They should also have dedicated teams capable of working up and implementing detailed project plans, while also minimising any business impact during the transition period. Product-specific technological capability is becoming increasingly important in this space, so formally-qualified in-country specialists in major ERP and treasury systems should also ideally be available, as should specialists experienced in migrating legacy technology.
However, in order to add real value, any bank involved in this transition should also be able to suggest and implement additional improvements and efficiencies. This would be important at any time, but has become even more so given the increasing involvement of financial buyers in M&A related to the Natural Resources and Utilities sector. According to IHS Markit , in the oil and gas sector during 2015, financial buyers spent more than USD25bn investing in acquisitions, joint ventures, and funding private exploration and production (E&P) companies. In metals and mining, financial buyers accounted for 56% of the M&A deal activity in Q2 2016, according to PwC . These financial buyers do not typically have in-house cash management or treasury expertise, so in order to make the necessary efficiency improvements they look to suitably skilled banking partners.
Another important angle on post-merger M&A integration is geography. Much of the current activity in oil and gas M&A has involved acquirers buying assets that are in locations new and remote to them, such as Asia. One important historical factor driving this trend is the spin-offs that a number of major integrated oil and gas players conducted in 2012-2013. Activist shareholders pressured these corporations to focus on E&P and divest downstream assets, such as refineries and petrol stations, as at the time they were perceived as an inefficient use of capital that generated sub-optimal returns. However, the decline in the oil price has boosted the profitability of the spin-offs, while leaving the corporations that divested them exposed. These pure E&P players have had to respond by acquiring new assets that are already in production in new locations, often in Asia.
This adds a further challenge to acquirers’ treasuries, as they find themselves having to integrate assets in unfamiliar locations in remote time zones. This consequently places a premium on the services of banks that have the necessary network footprint and global co-ordination skills to support this remote integration.
Time is also an important factor to post-M&A integration, given that acquisitions are often funded by capital markets or bridge financing activity. This creates pressure to realise as much internal liquidity as possible from any new acquisition quickly in order to reduce funding costs. There are a number of ways in which banks can add value in this respect.
In a world where notional pooling is decreasing in popularity as a result of tax and regulatory changes such as Basel III and potentially IRS Rule 385, and cash concentration is becoming increasingly popular. The ability to manage intercompany loans is key specifically in an environment where the structuring and record keeping for these can be extremely demanding for corporate treasury, especially when multiple bank accounts and new loans may be involved. If the partner bank has a comprehensive intercompany loan management solution, this will considerably reduce the management overhead and streamline the incorporation of new entities, as well as helping to avoid any inadvertent errors relating to thin capitalisation rules.
The quality of internal co-ordination within the bank can also heavily influence integration speed, particularly if the same bank is providing advisory and/or funding for an M&A deal (subject to appropriate observance of Chinese walls and related governance procedures). In this situation, considerable time can be saved by efficient internal handover, as integration planning can begin quickly, minimising any post-M&A hiatus and delays in accessing internal liquidity.
Cyclicality and the future
One of the distinctive characteristics of natural resources and utilities M&A activity is its cyclical nature - periods of high merger activity are typically followed by periods of divestment, before the cycle then repeats. There is currently no evidence to suggest that this will not be the case again. Therefore, while acquisition integration is currently front of mind for many natural resources and utility treasuries, it is worth remembering that the process of asset divestment can be equally painful from their perspective.
For instance, if a US-based corporation is divesting some of its Asian assets to a European corporation, it may have multiple changes to make post-divestment. Signatories on the remaining bank accounts may need to be changed, intercompany loan documentation may need to be amended and structural or other changes may be required to any liquidity management structures (e.g., one of the divested assets may have been a major contributor to net liquidity).
As with integrating an acquisition, for thinly staffed corporate treasuries the success of these changes can be heavily influenced by choice of banking partner. One that has all the necessary technical and relationship qualifications, plus long experience of industry M&A cyclicality is clearly desirable.
One thing of which treasuries of natural resources and utilities companies can be reasonably assured is ongoing change driven by corporate M&A and divestment activity. Therefore, with treasury headcount in the sector typically very low, the need for effective external support from the right banking partner is paramount. There is a growing appreciation among corporate treasurers that high-quality liquidity and cash management advisory from their banking partner is of strategic importance in M&A/divestment situations, especially if it is efficiently co-ordinated internally with other services, such as M&A advisory and structured funding.
These skills can make a material difference to the success of a merger, acquisition or divestment, by streamlining processes, increasing automation and reducing the time needed to access available liquidity. Furthermore, assuming the bank concerned has a truly global network, it will be able to deliver this consistently across multiple locations that are remote from the acquiring/disposing corporation.