The volume of strategic mergers, acquisitions, and divestitures occurring in the United States grew 25 percent in the first half of 2013. This trend shows no signs of abating as, according to PwC’s Annual Global CEO Survey, more than 40 percent of U.S. executives expect their company to pursue such a transaction over the next 12 months.
This increase in deal activity is occurring despite inconsistent evidence about the value of merger and acquisition (M&A) transactions—with some studies placing the failure rate at more than 60 percent. Companies sustain a high level of enthusiasm for M&A deals despite the known risks, largely because they focus on a deal’s synergies without adequately considering how they are going to identify, assess, and mitigate operational and organizational risks. In the recent PwC survey, executives planning to undertake a strategic transaction cited “creating and capitalizing on deal synergies” as the primary driver of their M&A aspirations.
Create a detailed transition plan with prioritized tasks. Treasury must develop a detailed transition plan that breaks high-level initiatives into discrete steps with corresponding dependencies, resource assignments, timelines, and costs. These initiatives should be prioritized so that resources are focused on the most critical functions, such as supporting payroll, before less-critical areas, such as updating policies and procedures.
Establish a transition services agreement (TSA). In the case of a carve-out, the new company may be unable to fully develop a treasury function by day one, and it may rely on corporate treasury services provided by the parent company under a TSA. During the early stages of planning the transaction, treasury staff must engage in pre-deal due diligence to fully define the scope of services that the corporate treasury function will provide to the new company, as well as the agreed-to service levels, duration of service, and pricing. The team needs to answer questions such as whether the new organization will continue to use corporate treasury technology and how much post-transition support the organization can expect from employees of the parent company.
To the extent that it can, the TSA should support the corporate treasury team’s strategic vision and align with the treasury function’s detailed project plan. This enables the transition team to focus on high-priority areas (e.g., opening bank accounts to process month-one payroll) before addressing less-critical issues (e.g., updating desktop procedures).
Likewise, transactions present an opportunity for an organization to re-evaluate and refine its treasury processes, policies, and procedures. Whether a deal requires updating policies to reflect the needs of the consolidated organization (as in mergers) or developing processes for the new treasury function (as in carve-outs), the transaction enables treasury to update its roles, responsibilities, and governance structure to enhance efficiency, controllership, and customer service.
Specifically, a treasury organization should consider possible improvements in its liquidity management, debt repayment, and bank relationship management practices. A treasury function that sets out to refine the company’s liquidity management processes can rationalize intercompany loan management, formalize its cash forecasting processes, develop or refine its investment policy, and operationalize debt management processes. By taking these steps, treasury can significantly improve its ability to manage cash, reduce working capital, promote tax efficiency, and accelerate the pay-down of external debt.