2015 saw substantial M&A activity with around $4 trillion-worth of deals, according to Deloitte’s M&A Index 2016, the highest value since 2007.
With companies sitting on record cash piles, banks note a growing trend of corporate treasurers holding a vital – and early – role in the process.
While treasurers were often barely consulted until a given merger was completed, treasurers and bankers say they are becoming key players in the pre-acquisition phase, given their cash piles to finance any deal, and, more generally, the value of their insights combined with the need to boost cash-flow management.
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Simon Jones, JPMorgan |
Simon Jones, head of the treasury services EMEA advisory team at JPMorgan, says: “There is increasing recognition of the benefits of having treasurers involved in pre-merger stage discussions. They can assist with due-diligence processes and bring expertise in identifying where there is cash available, borrowing facilities, and where short-term liquidity can be freed up for a potential transaction.”
Treasurers often need to be informed of a possible merger in advance to be able to integrate it into their cash forecasts, subject to confidentiality requirements.
Jonathon Traer-Clark, head of strategy for GTS, Bank of America Merrill Lynch (BAML), 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.”
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Jonathon Traer-Clark, |
Treasurers can be integral to the process of identifying risks to and synergies from a merger. Having a complete understanding of how the acquired company has been running its treasury will also enable them to facilitate integration post-acquisition.
Carl Slabicki, vice-president and senior product manager, treasury services at BNY Mellon, says: “Treasury teams need to know in advance about potential mergers, including the size, likelihood and timing, to effectively plan their cash flow.
"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.”
The ability to free up working capital is also one way the treasurer is becoming more valuable in the process. Using the company’s existing cash can be a cost-effective form of financing, often removing the need to search for expensive external funding to complete a transaction.
Slabicki says: “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.”
He adds that in some instances the treasurer has influenced the decision to end deal discussions, or uncovered key due-diligence concerns.
Mitigating risk
JPMorgan's Jones says: “Treasurers can work on bringing the project together by looking to mitigate risk, assessing the day sales outstanding in each company and work out what needs to be done under the treasury structure for the new company. Factors to consider include looking into supply chain financing, and look for the ability to gain working capital efficiency.”
Treasurers often cherry-pick the best elements of both companies to create new operating models.
“If the merger is taking place in the same industry, they can ask questions in the early stages of integration, such as around ratios and why these may be different across the same client and supplier base,” says Jones. “Or they could see where one company has implemented a process to free up working capital compared with their peers.
"It is rare to see the companies merge and not adopt a centralized model.”
There are rewards to be found for the treasurers on both sides of the merger.
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Carl Slabicki, BNY Mellon |
BNY Mellon's Slabicki says: “The main benefit for the smaller company being brought on board is that it can benefit from the larger acquiring company’s agreements. From day one of the merger, it can benefit from the larger company’s financial leverage in areas such as cash management pricing and services, access to lower rates on merchant card programmes, better supplier discounts or pricing terms, and many others.”
However, one note of caution.
For all the talk about the importance of cash management, the treasurer is not always kept in the loop with respect to M&A deals.
“For most companies, it comes down to a need-to-know basis,” says BAML's Traer-Clark. "Unless the treasurer has a seat at the table, they will often not be involved until the transaction is announced and proceeds to completion.”
Although the role of the treasurer is becoming more central, the degree of involvement can be dependent on the individual treasurer.
Bruce Meuli, global business solutions executive for GTS EMEA at BAML, says: “The level of involvement comes down to how broad the treasurer’s remit is as well as the individual capability and professional motivation that a treasurer can bring to the task.”
Treasurers without the necessary skills are capable of drawing from the other members of their team.
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Bruce Meuli, BAML |
Meuli says: “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.”
Traer-Clark adds: “We see an increasing number of treasurers taking on investor-relations roles. They are comfortable talking about the financials of the organization, and discussing the company performance and strategy is a natural extension of the role.”
Finally, treasurers need honest feedback from their banks about what they can offer and when it can be provided.
Slabicki says: “It is important for banks to be up front about what they can offer and the timelines around their offerings. 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.”