M&A activity is increasing. According to Deloitte’s M&A Index 2016 there was more than $4 trillion-worth of deals completed in 2015, the highest value recorded since 2007. There is also growing evidence that the role of corporate treasurers in acquisitions is becoming more important. Deloitte’s 2015 Global Corporate Treasury Survey found 70% of treasurers have now been mandated by their chief financial officers to become involved in a number of areas, among them offering greater support to other teams, including M&A.
This represents a big change in the role of the corporate treasurer. Traditionally, treasurers have been left out until very late in the M&A process. Not only does this leave them with less time to complete their side of the merger, it also ignores their valuable knowledge on what will be needed to complete the process swiftly. There is now a growing appreciation that the treasurer has a unique insight into a company’s financial position. Rather than being a secondary part of the acquisition, their skills are essential for raising the funds needed and for planning future integration.
|Christof Nelischer, Willis |
Towers Watson Group
The shift comes down to how the treasurers are now perceived by other teams in a company. Carl Slabicki, vice-president and senior product manager, treasury services at BNY Mellon, explains: “Historically treasurers did not have much influence. But now they are key contributors, with the M&A teams looking to them as partners rather than service providers.”
Corporates are realizing the treasurer can give them access to considerable sums that are readily available through their current processes, rather than having to go out to the market to raise funds. Philippe Marcotte, deputy head of cash management at Société Générale, says this ability is down to having increasingly sophisticated cash management tools at their disposal that can provide a full overview of the group and its subsidiaries. They understand what is available to be leveraged through instruments such as factoring or securitization. They also have control of overdrafts and credit facilities that can be used as a bridge to finance the acquisition.
Marcotte says: “Treasurers can raise hundreds of millions now through the liquidity management given by their banking tools. This gives the treasurer the real power.”
He adds that having access to this cash internally could be the make or break difference for an acquisition going ahead: “If the company cannot bring its own cash to fund a part of the transaction, it will be more difficult for them to finance it, because it will be considered as a heavy risk by the lenders or the investors.”
Being brought into the process at the earliest possible point will greatly aid the treasurer in having the necessary funds available at the right time. Although in the early stages the exact details of the acquisition may not be shared, providing treasurers with as much salient detail as possible will give them the edge in planning.
“Treasury teams need to know in advance about potential mergers, including the size, likelihood and timing, to effectively plan their cash flow,” says Slabicki. “Even if the exact details of the merger are confidential, the timing and amount required should be known as early as possible. The earlier they are involved with potential mergers, the more effectively they can manage how to finance them.”
For companies that regularly carry out acquisitions, the involvement of the treasurer is essential. Jonathon Traer-Clark, head of strategy for GTS, Bank of America Merrill Lynch, says: “We expect that companies with an institutionalized M&A process will organize their treasury to support repeat transactions. They will likely be closely aligned with corporate finance, but have to find the right balance on need-to-know and confidentiality.”
Their value at a senior management level is also being better understood. This is also changing their role, as their breadth of knowledge and skill sets are both expanding.
“We see an increasing number of treasurers taking on investor-relations roles,” says Traer-Clark. "They are comfortable talking about the financials of the organization; discussing the company performance and strategy is a natural extension of the role."
Bruce Meuli, BAML’s global business solutions executive for GTS EMEA, adds: “Running company mergers efficiently requires the treasurer to have a variety of skills, some of which may be new to the function. Cross-functional business knowledge, operational excellence and change-management skills are critical.”
Even those who sit at the centre of a large international team will find that they will be required to take the leading role. Meuli says: “Although treasurers working in conjunction with a shared service centre will have a pool of talent to draw from, they will still need to assume a leadership role during the M&A process.”
Having greater visibility in the M&A process is giving the treasurers more authority over which acquisitions are possible and how they can be executed.
Corina Keller, head of treasury operations and control at chemical company Altana, explains: “We will talk regularly internally to state up-front the limit of what we can afford within the next couple of months. It is not a case of the M&A team looking at what they want and then seeing if we can finance it, we have already discussed the highest possible amount under which conditions with them in advance.”
Their involvement can help complete the rigorous processes needed before an acquisition can be approved. Simon Jones, head of the treasury services EMEA advisory team at JPMorgan, points out that treasurers must work with the legal and tax teams internally to oversee how the funds are flowing.
Nelischer echoes this opinion. “Treasury needs to be involved before the final M&A decision is made," he says. "When a transaction is being contemplated there is a formal due-diligence process that will need to involve treasury. It is the last opportunity to pass on any concerns that arise from the treasury angle.”
Rando Bruns, head of group treasury at pharmaceutical company Merck, explains the treasurer’s involvement is vital for understanding how the acquisition could impact the company’s rating, a point that could lead to a proposed acquisition being dropped.
“As the prospect of the acquisition becomes more realistic, we work with the M&A team on the ratings presentation," he says. "We have to explain the rationale for the acquisition, the impact and the financial model. This needs to be constantly updated with the feedback from the negotiations and the due-diligence process."
|Bruce Meuli, BAML|
Any changes through acquisition can have a big impact on how treasurers run their daily business. Having this information in advance will allow them to plan in for these changes, or raise concerns if they are not able to meet the requirements.
Nelischer gives an example: “In the case of Willis Towers Watson, there was one particular M&A transaction that caused the step change as it was so large relative to the business. All earnings were generated in euros, which also promoted the realization the treasurer needed to be involved as it moved away from solely dollar revenue.”
Nelischer adds that this transaction was such a large development for the company, it required a lot work from the treasury team before it was formally approved.
“For a transaction that large there needed to be a proposal to the board on how it would be financed and the impact it has on the business, such as the credit rating and the currency profile of earnings," he says. "This needed to be considered and answered at an early stage in the process.”
The needs go beyond those of the regulator and the board; the treasurer can also ensure that the shareholders are being kept happy. JPMorgan’s Jones says: “There needs to be involvement from treasury to help execute the relevant payments to private shareholders or to public shareholders. The payment process should be conducted with precision, managing which days the funds will be moving and from which accounts.”
Fitting together two different companies is like completing an intricate jigsaw without having a picture as a guide. It may mean the two treasury departments do not align very evenly, but somehow they need to fit together. Involving the treasurers from both sides at the merger stage enables them to identify potential issues that could come up after acquisition that other departments may not recognize.
Through experience Keller says the treasurer can pick up on potentially difficult issues that others on the transaction may have overlooked, which could have a negative impact on the incoming employees. “On previous acquisitions we have had to pay the salaries of employees migrating with the company as soon as three days after closing,” she says.
The situation can end up being far more complicated than it first appears.
Keller explains: “However, in a particular situation, it turned out the acquired entity had never directly instructed payments from their bank accounts or been entitled signatories on these as this process had been outsourced or completed through a shared service centre. The treasurer could assume there would be no problems in this merger, but this highlights the importance of confirming that either the authorized signatories from the acquired company stay on board in the first instance or that new signatories are added at the time of the closing.”
Other companies apply a more active method to ensure that everything is working to plan when the merger is completed.
Bruns explains that Merck always seeks to fully integrate the systems of the incoming company by the date of completion: “Bringing together two separate companies requires great levels of integration. I want to have the target company fully integrated in our treasury processes with the day of closing. On closing day Merck moves all financial positions of the target company into our in-house bank, with complete transparency of all potential financial risks, and includes target companies in our intercompany clearing, external payment factory, as well as cash pooling.”
The merger requires cooperation from both treasury departments to facilitate an easy transition. “The treasurers of the two companies need to speak with each other as early as possible,” says Bruns. “Both treasuries need to understand how the other organization works. This is about treasury processes, not to gain any competitive advantage. There is no need to discuss the business, but to collaborate, to understand and prepare for the implementation.”
Bringing together two separate organizations can foster the opportunity to update existing working practices.
JPMorgan’s Jones says: “It is rare to see the companies merge and not adopt a centralized model.”
He adds that banks can add value at this point, giving guidance to treasurers on how to adapt to the changes. “Corporates can work with banks in an advisory function and work out how to combine the best of the two merging structures,” he says.
From the treasurer’s perspective, they need to have a reliable banking partner to complete the transaction. It is essential the banking partner is as nimble as the corporate. “There is a need to move fast,” says Bruns. "Acquisitions require billions of dollars or euros credit, which sometimes needs to be secured within a week."
|Carl Slabicki, BNY Mellon|
Treasurers are only able to plan if they have an accurate understanding of their banks’ capabilities. “It is important for banks to be up front about what they can offer and the timelines around their offerings,” says BNY Mellon’s Slabicki. "Treasurers need to know what is available and when it will be available to factor the options into their planning so they won’t be stuck if the bank cannot deliver what was promised."
Discussing the plans with banking partners can help the treasurer to decide if they are making the right decision. "We like to talk to several institutions at once to receive their various comments,” says Nelischer. "If we feel there is a consensus emerging in what we are trying to do we know we are in line with good business practice."
In the event of the corporate experiencing some new problem in the merger, the bank can help to advise the treasury on the best way to meet the requirements.
“The bank’s cash management team can help to optimize the treasury,” says Société Générale’s Marcotte. "The transaction process involves both the corporate’s team and the banks through the close monitoring of the financial flows of the transaction."
Getting a timely and accurate response from the bank requires the corporate treasurer to be open about their own needs and abilities. Nelischer cautions: “The advice that you receive from the bank depends on the quality and depth of information you have provided them with in the first place.”
The global reach and experience of the international banks is also a powerful support for treasurers. Ambitious corporates looking to expand into new markets may have the spending power, but can lack knowledge on the local customs, laws and FX requirements.
“To complete a transaction we would rather work with a local branch of an international bank than with a local provider we have no experience with,” says Keller.
She says there may be difficulties working with a local bank that an international bank can easily rectify.
“A local bank may state they are not able to deliver something as straightforward as a MT940 message," she says. "An international bank can verify if this is a country-wide issue or something individual to the local bank’s systems.”
Working with a long-term banking partner can make the transition much smoother, as the bank will be aware of how the company is run and be able to flag up any potential issues they see.
“When completing a full acquisition of a company that includes the employees and bank accounts, the treasurers should use one of the core banks as a key partner to verify they have not forgotten or overlooked anything in the jurisdiction,” says Keller.
The role of the bank as a trusted partner in the process should not be underestimated.
“During an acquisition in Brazil, JPMorgan helped us navigate this new market with challenges such as a restricted currency and cultural differences,” explains Keller. "As an international bank, the team understands both our expectations and those of the local company. They can assist with moving the process along."