Following the 2008 credit crunch most corporates were reluctant to expand via acquisition, but instead were primarily focused on cutting costs and growing organically - so corporate treasuries piled up cash. However, as confidence in the boardrooms revives in the post-crisis years, companies have begun to expand through mergers and acquisitions to further sustain growth.
As a result of this increased M&A activity, total deal value for the first nine months of this year reached an astonishing US$2.66 trillion, around 60% more than for the same period in 2013. This high level of activity was last seen in 2008. More intriguing is the fact that this year has seen a major resurgence in cross-border deals, which were practically non-existent during the past five years. Thomson Reuters reports the value of cross-border deals exceeded US$1 trillion, also not achieved since 2008.
The topic of tax inversion has spurred much discussion in the M&A arena this year and has partially affected cross-border acquisition activity. The tax inversion practice is basically a move where US corporates relocate their headquarters to lower-tax countries by acquiring a foreign competitor, while still retaining most of their operations on US territory.
For obvious reasons, tax inversions have been closely scrutinised by the US Treasury Department and consequently the tax code was recently modified, making them harder for US companies to carry out. Moving to a lower-tax jurisdiction has been particularly appealing to the healthcare industry, which has recorded US$368.8 billion of announced deals - making it the most active sector in 2014 to date.
The surprisingly positive increase in M&A activity has been accompanied by several deals that failed to complete. Again, this high level of failure was last seen in 2008. Interestingly, some of the biggest high-profile failures come from the pharmaceutical industry where the rationale for M&A activity was partially triggered by the possibility of tax inversions. One example was the largest attempted deal of the year, where US firm Pfizer made a staggering bid of US$116 billion for UK-based drugmaker AstraZeneca.
Another unsuccessful takeover was the more recent US$55 billion bid from US firm AbbVie for Dublin-based drugmaker Shire - supposedly, the deal was abandoned due to the newly-introduced change in the US tax code. All in all, corporate tax inversion has been among the hottest topics in 2014; however, these kinds of deals did not represent a significant portion of the total deal volume and it seems that Washington will terminate its further practice.
At the other end of the spectrum, the current outburst in cross-border M&A activity is much more influenced by the increased desire of European and Asian firms to buy US competitors. The figure for inbound funds to the US for the first nine months of 2014 is US$260 billion and is expected to keep growing. Sluggish short-term growth in the eurozone has encouraged European Union (EU) companies to seek further growth in the more stable US economy.
Taking everything into account, M&A global volume has been steadily increasing with little sign of any slowdown. Deloitte’s 2014 M&A trends report found that 84% of corporate executives surveyed expect M&A activity to increase or maintain current activity levels over the next 24 months. Despite this accelerated and positive outlook, almost nine in 10 respondents confirmed that at least some of their deals had not generated the expected return on investment (ROI). Effective integration was cited as the most crucial process in achieving M&A success, with 55% of executives citing failure to integrate as the most critical area of concern.
How to Achieve Successful Integration?
One of the key steps in mitigating poor integrations is to involve treasurers early on in the deal-planning process. The treasury department is well positioned to add value by detecting key risks and challenges that may arise either in the pre- or post-deal phase. Whatever those challenges might be, treasury will have to undergo some sort of treasury transformation project. Based on Zanders’ experience, any such project (not necessarily an M&A deal) focuses on four different treasury areas, classified as:
1. Treasury Organisation and Strategy,
2. Banking Landscape,
3. System Infrastructure and
4. Treasury Workflows and Processes.
The following table highlights typical trends noted by the firm as clients strive for simplified and effective treasury organisation.
The above table is also a good starting point for any treasury organisation facing an upcoming M&A deal. It offers an overview of current trends, where treasurers can identify where their treasury organisation will be once the merger is completed and also a good insight into what they will have to focus on in the post-close phase in order to achieve a uniform structure. This is identified in the table as the ‘Near Future’ trend and we also consider it as best practice. Depending on the deal, each area will be less or more challenging; nevertheless, all four points must be carefully considered.
The most crucial area during the due diligence and pre-close phase is treasury organisation and strategy. Treasurers should be well-aligned with the boardroom, to understand what the requirements of the future company are. Once the treasury team has a clear picture of the targeted ‘to be’ situation, they will be well positioned to design a treasury organisation capable of supporting the new company in the post-close phase.
Furthermore, having treasurers involved in the due diligence phase can add value to the deal itself in analysing the best approach to financing it and examining capital structure concerns. For example, insight into the target’s debt portfolio could flag potential areas of concern and give enough time to plan how to deal with upcoming debt obligations.
As the closing day approaches, treasury has to shift its focus to the remaining three treasury areas. In the short-term, it is important to ensure there is no disruption to the business on Day One. An example of such a task would be ensuring that the treasury team has appropriate authorisation on newly-inherited accounts.
Going forward there is more challenging and time-consuming work ahead, which involves the integration of two different banking structures and IT systems. The nature of the deal will determine how complicated these tasks are. In the case of a cross-border acquisition, integrating foreign banking relationships will be problematic due to different laws, currencies and language barriers. For example, it is not uncommon that the integration team, already late in the post-close phase, discovers that they have a large amount of cash trapped due to regulatory constraints in some countries. This makes it crucial to have a team with international knowledge and experience; not easily achievable in smaller enterprises.
As some accounts will be closed and some new banks introduced, another crucial aspect in achieving a coherent banking structure is having a well-balanced banking wallet. This can be done by applying the wallet distribution methodology, in which the amount of corporate banking business assigned to a banking partner - both in direct and indirect fees - is compared to that partner’s provided commitment. So treasurers must understand how their credit facilities will be impacted in the post-close phase under the new banking structure.
There is also the task of incorporating different technologies into a fully integrated system landscape. Where the ultimate goal is to achieve an integrated treasury management system (TMS), which can either be a best of breed system or enterprise resource planning (ERP) integrated. Treasurers argue that this among the most challenging tasks, since the skill to perform the job is usually not available in-house and it typically takes time. Thus, starting early with the system analysis and having a clear plan on how the integration will be performed is of utmost importance.
Last but not least, workflows and processes must be analysed and re-evaluated. In more complex acquisitions it is common to see the treasury moving from one country to another. If two treasury teams are combined, their policies and procedures need to be unified and standardised. We have also seen situations where key treasury personnel in the target company were forced to leave once the deal closed. Such situations can bring more unpleasantness to the entire process in the form of personal clashes within the new treasury team, so this is also an issue to consider.
For the reasons outlined, treasury’s role has a positive impact on the success rate of M&A deals. However, treasurers are still not widely represented during the deal-planning process as their involvement varies from one situation to another.
As the Association for Financial Professionals (AFP) reports, in some M&A deals treasurers took the lead role starting from the due diligence phase, while in others they were not involved until the integration process. Interestingly, the AFP also mentions that executives are more inclined to bring treasurers early on in the process when dealing with complex cross-border acquisitions.
That the role of treasurer has been changing over the six years since the crisis has now been widely acknowledged. More and more treasury and finance-related publications emphasise the importance of treasury’s involvement in strategic decisions. Evidence that treasurers are slowly, but surely, taking part in M&A deals is in line with this notion. Consequently, we expect to see an increased number of deals where treasurers take a more strategic function in the upcoming years.
Lastly, to offer one piece of advice to corporates planning to engage in an M&A transaction, we strongly recommend bringing in their treasury people early on in the deal-planning process. Not only will the team ensure a smooth integration, but it will also add value during the valuation and financing discussions.
An article from Nikola Soso, Associate Consultant at consulting firm Zanders, based in London.