Supporting Treasury Through the M&A Journey
By Terry Dennis, Head of Cash Management Sales, EMEA, Treasury and Trade Solutions, Citi and Declan McGivern, Head of Treasury Advisory Group, EMEA, Treasury and Trade Solutions, Citi
The past year has seen particularly strong levels of mergers and acquisitions (M&A) as corporations across a wide range of industries seek to boost growth, fuelled by a combination of large cash reserves and low funding costs. Treasury has a key role to play in the success of M&A transactions, from funding and monitoring acquisition flows upfront through to optimising liquidity, treasury operations and risk management in the longer term. In this article, Terry Dennis and Declan McGivern discuss some of the factors that help treasurers to contribute to M&A success.
Growth of cross-border M&A
One of the notable M&A trends over the past year has been the amount of cross-border activity, including a growing number of cross-regional transactions. More US companies are expanding into Europe and Asia, but there is also a growing two-way flow of transactions between emerging and developed markets. According to Citi research, M&A in North America increased by 18% during Q1, 2017, and 23% in Europe. New deal announcements totalled $560bn during this period. Similarly, a wide range of industries are engaging in cross-border M&A, including manufacturing, consumer and healthcare and technology amongst many others.
What these figures do not reveal, however, is that treasury functions have quite different experiences of M&A. For some, M&A will be a regular occurrence, with tried and tested playbooks to integrate new entities into treasury quickly. For others, transactions may be occasional, or the size of a transaction may be unprecedented. There are differences in the nature of an M&A too: some corporations will aim to rationalise and integrate treasury operations, balances and exposures quickly, while others will choose to operate treasury functions of acquired businesses on a largely independent basis for a period of time before undertaking an exercise to standardise, integrate and optimise key activities across entities.
A structured approach to M&A
Inevitably, the opportunities, pitfalls and banking needs will differ in each scenario. It is important that bank partners take time to understand each company’s specific requirements and provide expert advisory services – whether they are helping an acquiring or acquired company. The nature of the support that clients need will vary considerably. Companies who have never engaged in a large M&A transaction before may need a great deal of advice and support in identifying and planning the tasks on the critical path. In these situations, treasurers need their banks to offer advice on due diligence, policy, governance and organisational structures, including how best to gain visibility, and ultimately control over funding, liquidity, exposures and treasury operations.
One of the biggest challenges for many treasurers is that information on the acquired business is often limited, combined with the challenges of tight completion timescales. Speed and agility is essential in this situation, and treasurers need to be confident that their bank can offer an integrated, responsive service for due diligence (including KYC) and account opening, and to provide day one visibility of cash, funding and liquidity requirements.
Similarly, M&A between organisations that have quite different characteristics, such as a B2B vs B2C business model, can create challenges, particularly in areas such as cash visibility, payments and collections and aligning cultures. Cross-border transactions bring the added difficulty that the transaction may not take place in the corporation’s functional currency; similarly, the acquired entity may have quite different currency exposures. At Citi, we help companies to hedge exposures to achieve certainty of the actual closing price, and to understand and develop appropriate strategies to manage a new and potentially unfamiliar risk profile.