Treasury Present and Future: Natural Resources and Utilities M&A
by Lance Kawaguchi, Managing Director, Global Head - Corporates, Global Liquidity and Cash Management, HSBC
Natural Resources and Utilities (NRU) is currently one of the most dynamic sectors for M&A globally, with most regions experiencing high deal levels. This has knock-on implications for NRU treasuries that need to be addressed both now and in the longer term. Lance Kawaguchi, Managing Director, Global Head - Corporates, Global Liquidity and Cash Management, HSBC, examines these implications and some potential treasury strategies to address them.
How does M&A activity impact treasury?
M&A activity affects corporate treasury in multiple respects. In the general sense, it results in a palpable increase in workload. More specifically, it will involve handling a raft of bank relationship and bank account management changes, such as the opening/closing of potentially multiple accounts. One of the consequences of this is the need to change signatories and bank mandates in accordance with the new corporate leadership structure, possibly to an extremely tight timeline.
The overall liquidity position of the corporation may also change appreciably. Treasury may have to adapt rapidly to a shift from the corporation being cash-positive to cash-negative. Even if that is not the case, treasury may have to manage the orderly release of off-balance sheet liquidity from investment instruments with contractual notice periods in order to partially or completely fund the acquisition up front. Alternatively, if an acquisition is funded by external debt, there will be time pressure to release as much surplus liquidity as possible from the acquisition to pay down this debt and minimise interest costs. More generally, existing liquidity structures may need substantial adjustment to accommodate new markets and currencies, or the removal of those markets and currencies in the case of divestments.
On the technology front, treasury may find itself post-acquisition having to contend with legacy systems and/or multiple ERP systems (and versions thereof) plus their integration with existing technology. In the case of divestments, treasury technology may require cloning to enable the independent operation of the divestment.
The importance of treasury involvement in M&A
Apart from the immediate consequences for treasury of M&A activity, there are more general corporate reasons for involving treasury as early as possible when such activity is in prospect. One example is the need to ensure existing financial operations are not disrupted during the M&A activity, such as a divestment's ability to pay suppliers and operate normally from its first day post-divestment. By the same token, an acquisition will have legacy bank accounts and infrastructure, in which liquidity may remain trapped until treasury has full visibility and control.
Many treasuries have also started to assume a broader risk management role, beyond purely financial risk. Therefore, early treasury involvement will also improve treasury's ability to advise on operational risks before, during and after M&A activity.
NRU M&A: Global themes
The global M&A environment in which NRU treasuries must operate is highly active at present, with the decline in oil prices since early 2014 a major factor. One response to weaker oil prices has been for companies to streamline their operations wherever possible, such as through the sale of non-core assets and operations. In several cases, buyers of these assets are looking to use any acquisitions as also an opportunity to diversify and access new markets. Two examples of this would be Chinese NRU corporates investing in Europe and US NRU corporates buying Asian assets.
Certain subsectors within NRU have had to adapt to considerable financial changes. For instance, oil field services companies have seen a major fall-off in business due to low oil prices and thus reduced exploration/production activity, which has also resulted in an associated increase in their working capital requirements.
More generally, the global NRU environment has placed further liquidity performance pressure on treasuries as the ‘lower for longer’ outlook on oil prices has become more widely accepted. This is an area that treasuries will typically always seek to improve, but at present the pressure to do so is particularly acute. However, at the same time, cost-cutting is a major priority in the NRU sector so treasury teams are lean and are very likely to remain so: doing more with less is now the new normal.