It’s a generally accepted norm that treasury should be involved with any mergers, acquisitions and divestitures — pre the close, and certainly as part of the due diligence process. However, this is only half the story — what happens post the close, where should you focus and what is required to successfully conclude the integration plan? In particular, what are the key pieces of information and areas to consider?
After all the hard work and preparation, you could be forgiven for thinking that the actual integration or separation associated with your transaction would be plain sailing. Your planning process encompassed all the appropriate parties — legal, tax, HR, finance and of course the business units — and, in an ideal world, the execution of these plans should present no concerns. However, at this critical junction, many stakeholders undergo a complete change in their perspectives.
The board, which previously looked for synergies, appropriate balance sheet constructs, intellectual property controls and business operating model enhancements as part of a theoretical construct are now expecting delivery on these proposals. The group CFO, having focused on the appropriate finance and controls, is now looking for integration or full separation without issues. As a treasurer, your focus has gone from debt financing, capital planning and transactional controls to a change process associated with new assets, entities, liquidity, processes, policies and of course people, with the latter being perhaps the hardest needle to move. Furthermore, you may be required to assist with IP transfers, tax and entity restructuring and other operating associated with legal — treasury is aligned to the business operating model and as it changes so must the treasury function.
As a treasurer, you need to be able to work dynamically when confronted with these challenges, particularly if you are running with multiple transactions at the same time — a frequent occurrence within large corporates, many of whom have dedicated resources focused on managing and deriving the benefits of the transaction. If you are fortunate enough to have one of these functions, then the integration playbook becomes the script by which you execute. However, just as any actor will tell you, the script only tells you part of the story. Interpreting and successfully representing the playbook requires multiple skills to derive the best performance, and earn the cast an Oscar.
On Day 0, the focus is on the close, particularly the transfer of funds. For Day 1 of the new regime, the first priority should be the evaluation or validation of the due diligence already undertaken. Financial controls are critical at this junction, and in conjunction with audit serve to protect and assess the asset. Questions around reputational risk, fraud, controls and governance need to be addressed quickly. Audit should perform due diligence on large financial transactions, the investment portfolio, financial policies and security. Financial interfaces such as those around banking workstations and treasury management systems should be assessed and if appropriate, re-defined.
Prior to the transaction, treasury likely defined the funding strategy for the transaction, which in the case of an acquisition may involve using the acquired company’s funds for debt repayment. The new capital and debt structure of the organization will need careful management, particularly if ratings agencies are involved. Regardless of the transaction nature, in all cases the credit and facility arrangements (including items such as covenants) need to be reviewed for business value and necessity and then closed, renegotiated or otherwise managed. All these should have been captured up front in due diligence, but it’s not unknown for some to be missed. Hence the critical role of an audit — assessing the banking relationships, facilities and accounts, along with associated mandates and authority, is a key validation of the information initially provided.
Acquisitions for scale and market growth normally generate additional challenges, particularly for treasury. If you’ve ever managed cash in some African countries, for example, you’ll know that the existing talent within the acquired company will be critical to retain. Furthermore, your banking providers should be able to brief and assist you on areas such as the economic environment, local regulations and capital controls. This information is likely to be useful for tax and legal, as well as the financial controller function.
Corporate governance requirements are of particular importance when considering board resolutions. These convey the authority to perform certain duties in the course of entity management and are vital components underpinning the authority of treasury. Without this documentation being updated, many companies will struggle to engage banking providers to perform even routine tasks.
Technology is now a vital part of treasury, from the treasury management system, to bank workstation access and banking interface systems such as SWIFT gateways. Regardless of the nature of the transaction — acquisition or split, a target state assessment and architecture design process will create the mid- to long-term solution, but in the short term it may be necessary to preserve the present state and integrate data manually.
Records management becomes a vital discipline at this time, preserving decision support information and materials.
Furthermore, it’s important to recognize that any change creates a multitude of responses — ranging from delight to resistance and malaise. The treasurer will be affected no differently but has the challenge of leadership as well as execution. Financially savvy staff working within treasury will likely perform critical analysis of any transaction based on their own acumen. If it doesn’t stack up, then “change challenging” will become the norm and will quickly consume the already limited resources. For this reason clear, consistent and regular communications are critical components of any transaction. Last, but by no means least, it’s vital to ensure that everyone is looking forward — there is no reverse gear in such transactions, and your achievements will be negatively impacted when members of the team are looking in the rearview mirror. It’s the hard choices, not the easy routes that will ultimately reap the rewards.
For staff, the basics should be in place — remuneration, HR policies and support. No matter what the nature of the transaction is, it’s also important not to overwhelm your employees. For an acquirer, the priority is normally focused on achieving synergies as soon as possible by obtaining information quickly. For those being acquired there is likely to be a more personal focus. In the case of a divestiture — particularly a split — people may reminisce about the previous size of the team. It’s important to focus on the benefits for all — at a company, regional, departmental and team level — to keep the focus on forward progression. Assigning specific communication channels and people is a critical component of a large transaction — benefiting both parties. The focus should be on financial controls and visibility.
For many, the use of an integration strategy and associated plan will give comfort. If it’s well defined and procedural in nature it will keep everything moving in synchronization across all stakeholders. All parties have a duty to evaluate the synergies of the transaction, particularly in acquisitions where the acquirer may find enhanced capabilities and processes beyond their own areas of existing expertise. This critical feedback loop — the opportunity to develop and evolve — should not be omitted as it can provide vital acceleration to achieving the synergies of working methods. In doing so one might find a more optimal capital structure, enhanced liquidity management and other similar benefits.
Finally, it is strongly advised to keep a watchful eye on key financial metrics, particularly for public listed companies. Liquidity, cash and debt need to be reported and controlled, and investors will be keen to understand ratios such as debt/equity, leverage, interest cover and operating free cash flow. Working capital metrics will be impacted by any balance sheet changes — assess these and look to unify/capitalize on opportunities as they present themselves. The assessment and subsequent adjustment of these KPIs give plenty of opportunities for your high performing treasury team to advance themselves. Of course, governance and compliance need to be constantly appraised and implemented too, and these should be the first operational priorities, in conjunction with the treasury core processes of liquidity management, FX, investments, hedging and cash forecasting.
As the treasurer, you have a vital role to play regarding any kind of transaction, to keep the business functioning. Change control is a practiced discipline that requires effective communication and planning to succeed. Earning the Oscar is one thing, but keeping the show running and performing to regularly packed theatres requires alignment and understanding of the value of the business, its stakeholders and its clients.
- As a treasurer, your focus is on a change process associated with new assets, entities, liquidity, processes, policies and of course people
- Audits are critical to assessing the banking relationships, facilities and accounts, along with associated mandates and authority
- Assigning specific communication channels and people is a critical component of a large transaction. The focus should be on financial controls and visibility.