Natural Resources and Utilities sector
M&A Liquidity Management: Making a Smooth Transition
by Jennifer Doherty, Global Head of Commercialisation, Liquidity & Investment Solutions, Global Liquidity and Cash Management, HSBC
While the number of M&A deals in the natural resources and utility (NRU) sector has been slightly lower than previous years, it is expected to increase in the coming year . This anticipated increase makes it more likely that post-M&A integration challenges will also become an increasingly common issue, as NRU treasuries are more likely to find their organisation involved in some form of M&A activity. If so, how well they address the resulting liquidity management challenges - both pre- and post-M&A - will be a major element in determining the overall success of the transaction.
Getting your own house in order
Perhaps one of the biggest priorities for treasury when there is a higher probability of their company being involved in M&A activity is ensuring that existing cash and liquidity management is as good as possible. An acquisition may already have excellent cash and liquidity management techniques, or it may be entirely at the other end of the spectrum. If the latter, then the acquirer's treasury will have a major project on its hands that will be exponentially harder if it also has to put its own house in order at the same time. Therefore, the more efficient and scalable your own structure and the sooner you can understand your acquisition the better.
There is additional pressure to review and optimise existing liquidity management arrangements now, because in addition to higher levels of sector M&A activity, NRU treasuries have only comparatively recently been affected by tighter liquidity conditions. Treasuries in most other sectors felt the liquidity impact of the 2008 financial crisis almost immediately and had to respond equally immediately by improving cash visibility, control and centralisation. At the time, the NRU sector was under much less pressure as a period of relatively high oil and commodity prices had left many companies with sufficient internal liquidity. Since the decline in oil prices began in early 2014, this situation has changed, as witnessed by the number of oil and gas business failures, with more than 100 oil and gas companies around the globe filed for bankruptcy during Q4 2014-Q2 2016 .
Increasingly, treasuries are turning to their banking providers to help ensure that they have the most effective solutions and technology available in place, both generally and as prelude to possible M&A activity. A suitably-qualified banking partner will not only be able to provide context on what is considered industry best practice and systems, but also do so in a global context. This benefits the immediate situation, but may also prove invaluable if the acquired asset has operations in unfamiliar locations.
Settling the transaction
Given cost/availability constraints on external funding sources (see ‘Funding and cost reduction’ below), there is considerable onus on treasuries to maximise the usage of trapped cash pre-M&A so it can be used as an internal funding source. Given the right banking partner, treasuries may find that even cash in demanding locations is actually more legitimately accessible than they realise. The obvious corollary to this that invisible cash is unusable cash and so there is a concomitant need to maximise the visibility of available funds (both 'trapped' and otherwise). Again, the right banking partner can do much to assist here to provide a single window view of cash, even where some balances are with third party banks in remote locations.
If an acquirer is partly or completely funding M&A with internal resources, then an important consideration when it comes to completing the transaction is the location and availability of the necessary cash. Where does the company have its off-balance sheet cash invested? How liquid are the assets? What call times or formal notices are involved when redeeming assets? In a department typically as lightly-resourced as treasury, checking and double-checking all these points in the run up to an acquisition (in addition to day-to-day treasury tasks) can be extremely demanding. The obvious concern is reaching the point of remitting the funds for an acquisition and discovering that a significant proportion requires notice that hasn't been given, or some similar hitch.
Apart from pulling together all the required cash to pay for an acquisition, there are various other elements that could potentially cause last minute problems, such as unfamiliar cut-off times or correspondent bank capabilities. Remember, there are no SLAs for receiving international money transfers. Ensuring funds arrive on the correct value date is also extremely important given the quantum. Closer to home, the funds paid are often required to flow through different legal entities for tax and ownership purposes in a sequential order, particularly if an in-house bank is maintained by the acquirer. An experienced bank that has assisted with multiple M&A transactions in the past is ideally placed to help avoid these types of issues. It is therefore advisable to ensure that key banking partners are fully briefed and that communication lines are continually open in the run-up to any M&A settlement, particularly as a delay in settlement can have considerable consequences.
Funding and cost reduction
Another strand to the recent liquidity pressure on NRU treasuries is the reduced availability of external financing from financial institutions. Some banks have reduced their exposure to the sector, or withdrawn from the market altogether. The consequent supply/demand impact has increased the need to maximise the use of existing internal liquidity to fund M&A activity. This might require additional refinements to existing liquidity structures, as effort/benefit ratios may well have changed. An untapped pocket of liquidity might previously have been considered not worth the labour of centralising. That may no longer be the case if the cost gap between internal and external liquidity sources has widened.