Merger and acquisition activity has boomed in recent years as many companies used their accumulated cash piles to finance strategic deals. Although treasury plays a key role in successful M&A transactions, its contribution can often be misunderstood or underappreciated.
In today’s low growth economic environment, forward-looking companies with strong balance sheets and access to capital continue to turn to mergers and acquisition (M&A) activity to create strategic growth and increase market share.
The past two years were record ones for deals, with a marked increase in overall activity and an increased trend in megadeals of more than US$5bn, according to PwC’s year-end deals outlook for 2016. Until it was terminated in April, Pfizer’s planned acquisition of Allergan was valued at US$160bn. In fact, PwC’s 2016 Annual Global CEO Survey highlights that over 50% of chief executive officers (CEOs) are completing domestic or cross-border M&As this year.
While deal making got off to a slightly slower start than expected in the opening months – due to equity market volatility and regulatory impacts, among other factors – there is anticipation for a healthy pick up in deal activity through the end of 2016. CEOs will continue to pursue M&A for growth and will likely also increase the scrutiny of transactions to ensure they reap expected rewards and mitigate integration challenges.
In this deal environment, how can treasury help ensure efficient, event-free transactions? By getting involved in the transaction as early as possible.
Treasury’s role in the deal environment is often misunderstood or underestimated, impeding efforts to get fully involved:
Treasury often has difficulty in getting early involvement during a deal, primarily because its importance is underestimated and management often views its role to be more functional and administrative as opposed to strategic. This can lead to unnecessary delays as the deal progresses, as well as a rise in unexpected issues that may affect Day 1 readiness.
Treasury is a critical participant in the deal environment because it has responsibility over key areas that influence drivers of transaction success, such as cash and liquidity management, internal funding strategy, financial risk management, and capital market access. The typical treasury activities listed below illustrate how vital the function is in a deal environment.
• Determine the most effective ways to manage global liquidity, including cash positioning, cash forecasting, internal financing strategy and cash controls.
• Decipher how to operationalise tax strategies, which are often an integral source of value for the transaction.
• Help to identify and mitigate financial risks, including the establishment of financial risk management programmes and managing existing or required financial instruments.
• Develop an optimal banking structure and establish key banking partner relationships.
• Ensure the banking and technology infrastructure is in place to collect, disburse and concentrate cash so the businesses can operate smoothly as of Day One.
• Interpret financing agreements, track external debt and define covenant compliance needs.
• Transfer and establish letters of credit (L/Cs), bank guarantees and surety bonds.
• Help to define, evaluate, and review the transaction service agreement (TSA), as needed.
These critical activities are often underestimated and as a result, treasury is not brought into the deal planning discussion when it should be. This barrier to access can be compounded by the sensitivity of the transaction itself, leading management to keep to a minimum the number of team members involved.
The planning team may also emphasise getting the deal completed, as opposed to the post-close efficiency that drives value extraction. Finding the right balance between execution and optimisation is one of the most difficult things to manage throughout a deal. Treasury can add significant value in determining where along that pendulum the organisation should lie.
These challenges coalesce into delayed and incomplete treasury involvement, presenting significant risks. Transaction financing may be inefficient or more costly. The banking structure and liquidity management process may not be fully in place by Day One which could lead to unexpected operational risks and challenges. The TSA may exclude critical treasury and cash management activities resulting in unintended costs and increasing transactional and cash management risks. All of these challenges are avoidable and the risk of delays can be significantly reduced with the increased involvement of treasury at the planning stage.
What steps should treasury take to secure a seat at the planning table?
The following steps can help increase the likelihood that treasury gets involved earlier in the deal process.
• Increase visibility: Be more vocal about potential operational issues due to delayed involvement and take steps to clarify why early involvement can help make treasury processes more effective and less costly in the long run. This may take the form of a department ‘roadshow’ whereby treasury leaders present the critical activities their team performs and the value-added strategic advice it can provide.
• Educate management: Educate senior management and the chief financial officer (CFO) on the role of treasury regarding not only critical day one activities, such as liquidity management, but also the execution of the overall transaction strategy, such as the implementation of tax strategies. The more treasury can connect its activities to the success of the transaction strategy, the more the department’s role will resonate with senior management.
• Build relationships: Start to build strategic relationships before, during, and after deals with key players in your organisation’s deal-making team; namely the business development function. For example, the treasury team can leverage its financial expertise and offer to provide support on valuations and return on investment evaluations. Having strong relationships and high credibility with key stakeholders prior to an actual transaction will encourage those individuals to ‘pull’ treasury into the planning process, thus reducing the need for treasury to ‘push’ to get involved early.
• Identify past deal challenges: Conduct an assessment of your organisation’s past transactions and integration to identify areas where more treasury involvement would have reduced risk and led to a better post-close outcome. Quantify value lost where appropriate and develop recommendations to avoid sub-optimal outcomes in future transactions. Communicate the assessment observations and identified improvement opportunities to key stakeholders, emphasising the importance of the treasury role in realising benefits.
• Align the support organisation: Partner with other support departments, such as human resources (HR), tax, and accounting, during the due diligence phase. By aligning the support organisation through a coordinated plan for Day One operations, treasury can increase its clout within the planning team and its strategic support of the transition effort.
• Build your team toward the future: It is extremely frustrating to have a vision for your organisation, but the wrong resources and tools to execute on that vision. Treasurers should be surrounding themselves with employees who can add value beyond the routine requirements of cash management. As treasury’s role in the organisation expands so will the need for treasurers to rely on a strong team to support them.
It should be noted that even with the strategies listed above, the impact of culture cannot be underestimated. In many situations, the treasury organisation finds it difficult to re-brand itself from being a functional owner to being a strategic partner. It may take a long time for that re-branding to occur; however treasuries that singularly focus on execution are becoming obsolete and are more likely to find themselves without a seat at the table when major decisions are being made.
By taking these strategic steps, treasury will be well-positioned to play its rightful role during a deal by getting involved earlier in the planning process. This can lead to smoother, event-free transactions and yield value creation opportunities for the new organisation and additional credibility for the treasury function as a strategic business partner.
*Jeffrey Frankovic and Gerik Whittington were contributing authors to this article