The big two pull ahead of the field 
WHEN STEVE HENDRY, senior vice-president of financial planning at MGM, took on the challenge of building a centralized international treasury system to handle mass payments and disbursements for the company's burgeoning home entertainment business, he maybe forgot about the law of unintended consequences. Could he have inadvertently set his company up as an acquisition target?
To be fair to him, he had more pressing concerns in the autumn of 2003, when the board and senior management of MGM mandated implementation of this complex, IT-intensive, cross-border project within a few months.
Starting almost from scratch, Hendry had to sketch out his requirements for international cash management, request and vet proposals from the leading banks, and then build a centralized, scaleable system fully integrated into the firm's enterprise-wide SAP software. Hendry and his chosen bankers from JPMorgan got the job done in record time, enabling the iconic American movie company to reap the benefits of growing demand for home DVDs.
But barely had Hendry and his team had time to celebrate this success at the end of August last year than the company found itself circled by potential acquirers eager to lay their hands on MGM's key asset, its library of 4,000 films. It's a lucrative list: as well as the James Bond titles it includes popular classics such as The Great Escape, The Good, the Bad and the Ugly, Rocky, Annie Hall and Some Like it Hot.
MGM was eventually acquired by a consortium of industry and private-equity buyers comprising Sony Corporation of America, Providence Equity Partners, Texas Pacific, Comcast and DLJ Merchant Banking Partners. They completed the $4.9 billion deal in April 2005. The headlines concentrated on the synergy between Sony's strength in producing new box-office hits, such as the Spiderman and Men in Black films, and MGM's rich back catalogue.
Although it might be stretching things to say that the transformation of MGM's international treasury sparked the takeover, Hendry's behind-the-scenes success must have made the company a more enticing target.
Back in 2003, MGM was distributing its home videos and DVDs through Fox, one of its rivals. With sales of DVDs taking off, MGM decided to exercise the right to take distribution back in house in certain key territories and to build its own distribution network from the ground up. At the sharp end, film companies seek to negotiate the best space and positioning inside such stores as Virgin and HMV. MGM decided it had to do this itself to maximize its most valuable asset.
The firm's treasury had to adapt to this new design in a key operating business that now had to handle large unit volumes and associated payments in Europe and Australia. "Previously, our banking arrangements outside the US were limited to overhead disbursement accounts, scattered throughout Europe and Australia," Hendry recalls. "Now we needed a much different banking solution."
Hendry took the opportunity to design a system that provided complete visibility of cashflows to the firm's treasury centre in Los Angeles and did not depend on treasury centres around the world. In addition it had to be scaleable. The new distribution system had to cover the UK, Germany and France from the start of 2004, as well as Australia. The Benelux countries were to be added soon after. Finally, it had to be highly automated, integrating with the SAP systems MGM had developed in the US and Canada and allow for straight-through processing.
Hendry had represented MGM's treasury in the management group that recommended the new distribution strategy to the company's board. So he had warning of the tight four-month deadline that was coming his way. He realized he needed help and engaged treasury consultants from Treasury Alliance Group based in Chicago to help fine-tune his requirements and design a web-based request for proposals to the banks. MGM sent this to five banks and interviewed them at presentations in September 2003. "The others were all large banks that could cover Europe, though they could not all cover Australia, which was a factor," says Hendry. "And we had to decide fairly quickly because the January 1 2004 deadline was now looming."
What swung it for JPMorgan? "Organizationally, they were well set up to handle our goals and were able to demonstrate a commitment as an organization to serving US-based global companies in Europe and beyond. And JPMorganAccess was ahead of other banks' products," says Hendry.
That's not to say MGM was simply buying an off-the-shelf treasury system.
"Products like JPMorganAccess are only tools that we use to help engineer a particular solution for each client," says Maurice Cleaves, senior vice-president in treasury services at JPMorgan. "Centralizing their treasury function is now a goal for many corporations: it's in vogue. Achieving that requires pulling together various components – branches, partner banks, products and IT that transforms and integrates local country data into the required format – and tailoring them for the client's needs."
Such a complex IT-intensive project carries obvious implementation risk, especially with time being short. The key for any corporation contemplating such a move is that it should not assume that it can simply hand it over to its bankers. "It relies on close attention from the client," says Cleaves. "Even where a client does not want to implement quickly, this is still a partnership effort."
The high degree of automation was crucial. MGM's SAP systems have to feed bank files to a third-party service provider that also uses SAP. This undertakes fulfilment of customer orders and billing. Few people are needed: two treasury heads at MGM in Los Angeles and one in London managed implementation of the project and its running.
A comfort to lenders
The new system features an end-of-day sweeping arrangement that allows for efficient collection of surplus cash, helps better cash forecasting and minimizes short-term funding costs. Surplus cash in Europe can be moved back to the US with minimal human intervention, eliminating the need for a London treasury staffer to communicate frequently with local treasuries across Europe.