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.
How can your organization beat the odds and successfully navigate a complex merger, acquisition, spinoff, or carve-out to increase profitability, market share, and shareholder value? One key driver of M&A success—from initial scoping through transaction close and beyond—is the performance of the treasury function. Due to its financial importance, operational significance, and organizational complexity, corporate treasury often serves as the bellwether of a deal’s success. It’s critical for a treasury function to manage the risks inherent in a large-scale transaction, while capitalizing on the opportunities to strategically transform the newly formed organization.
Treasurer as Both Strategic and Tactical Thinker
When considering a potential transaction, companies tend to focus on deal value. They measure success using such attributes as the potential to grow revenue, cut costs, extract cash, improve working capital efficiency, and accelerate debt repayment. Often overlooked or underappreciated are the complex drivers of these improvements. Factors like organizational refinement, process efficiency, and technology integration are crucial to a successful merger, acquisition, or divestiture. Nowhere is this more apparent than within the treasury function.
In many transactions, managing cash generation, financial risks, and access to capital markets—all within the purview of the treasury function—are critical drivers of the transaction’s success. However, limited representation of treasury staff within M&A decision-making, and a lack of functional understanding by those making decisions during the initial deal planning, often result in unrealistic goals and misaligned expectations with respect to treasury transformation.
“In order for a transaction to be successful, treasury must ensure it has a place at the table early in the deal-planning process to highlight and action the myriad of complex issues inherent in any carve-out, spinoff, or merger,” says John Sanders, interim treasurer of Axalta, which recently was divested by DuPont in a sale to The Carlyle Group.
Leading corporate treasury functions are aligned with their organization’s business development teams, and they get involved during the due diligence phase of every major transaction. During this period, treasury can add value by identifying and evaluating key risks, conducting a cost analysis, and determining potential pre- and post-deal issues. This enables treasury to uncover significant risks early enough to allow for adjustments in the pricing of the deal or rethinking of considerations in the transaction services agreement.
Once the deal is signed and prior to close, the treasury function should:
Form a strategic vision. A treasurer should understand the needs of the company and develop a vision of how the treasury function will support those needs after the transaction closes. Treasury should conduct a structured, process-based assessment of all aspects of the deal, including requirements for IT and the treasury function, external debt financing covenants and constraints, organizational structure, IT strategy, operational inputs and outputs, and alternative businesses models. Based on the results of this assessment, the function needs to define the newly formed organization’s desired end state in each of these areas and the value the merger, acquisition, or divestiture will bring to the organization as a whole—whether it’s improved operational efficiency, reduced risk, minimized cost, etc.
Once it is formalized, the strategic vision should drive all subsequent decisions about the transaction. Operational realities may necessitate short-term deviations, but the desired organizational end state should inform the treasury team’s thinking throughout the deal’s planning and after it closes.
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.
Separating pre-close activities from post-close tasks can assist with prioritization (see Figure 1, below), as can working to anticipate likely challenges inherent in forming and operating the new organization. It can also be helpful to ask probing questions—for example: What will the new treasury function look like from a resource and organization perspective? How will a changed credit environment affect the new company (e.g., impact on notional or physical pooling, supplier financing, etc.)? How will the current landscape of IT systems change on day one, and what impact will those changes have on treasury operations? What is the optimal level of operating cash, by legal entity, on day one? Many of these questions will not yet have answers, but thinking through their implications will help enable treasury to further define, refine, and prioritize the required transition tasks.
Finally, it is important to remember that the treasury team’s transition plan is a dynamic document. It should continue to be refined throughout the merger, acquisition, or divestiture process.
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).
Form a dedicated transition team. The corporate treasury function must be prepared to maintain its usual day-to-day operations at the same time it executes transformational initiatives. This is often a challenge, as treasury is typically not staffed to support transition requirements from the standpoint of either resource capacity or skills. The use of interim treasury staff redeployed from other areas of the company, and/or contracting with a third party to provide additional resources, can allow the core treasury team to maintain daily processing while providing the strategic support needed to advance the transition.
Interface with key stakeholders early and often. Throughout the deal, corporate treasury should work closely with the new company’s other internal stakeholders to support cross-functional initiatives. Tax, legal, accounting, and human resources will each have work streams that dovetail with treasury projects, and it is important to identify these intersections early in transition planning, and to highlight dependencies and explore potential synergies.
Additionally, the treasury team will need to work closely throughout the transition with external parties such as banks, system vendors, and insurance brokers. Treasury should identify the required third-party touch points early in the deal planning process to establish key relationships and ensure that ample time is devoted to completing the required initiatives that involve external parties.
Project-manage progress and dependencies. Treasury managers should establish a formal project management structure for overseeing the team’s multiple initiatives related to the transaction and for ensuring that tasks are completed on time and issues escalated appropriately. Treasury initiatives dependent on other groups should receive enhanced focus, as these are typically where delays occur. An executive resource should be empowered to make decisions quickly and resolve conflicts that may arise between treasury and other functions.
Describe the day-one operating environment. After the deal is signed and prior to close, treasury should design and, to the extent possible, begin to implement a day-one operating environment to support run-and-maintain activities. Depending on the deal type, this operating environment might closely resemble the strategic vision (generally the case for spinoffs), or it might support only the most critical treasury functions (typically the case in carve-outs). Regardless of the deal type and the maturity of the day-one operating environment, the treasury team needs to stay focused on aligning, running, and maintaining operations that fit with the function’s long-term strategic vision.
Communicate to employees. No matter how well-managed a merger, acquisition, or divestiture is, it’s certain to induce anxiety. Treasury managers need to engage employees in an ongoing dialogue about expected changes in order to foster an inclusive environment of knowledge sharing. Open communication demonstrates that executives recognize the transaction’s impact on the organization and are interested in addressing the views and concerns of employees.
Laying the Foundation for a Leading Treasury Function
Catalysts for meaningful treasury enhancements are inherent in any deal, as management recognizes the need for change and that a successful transition will require some investment. With effective due diligence, planning, and execution, a treasury team can leverage the transition period to further the goals and objectives formalized in its strategic vision. Initiatives that might not have been funded in the absence of a transaction—such as upgrading core technology or hiring a new regional lead—can be accomplished under the banner of the merger, acquisition, or divestiture. Seizing such an opportunity requires careful pre-deal planning and post-close execution.
One area in which a merger, acquisition, or divestiture presents the opportunity for improvement is in the structure of the treasury organization. A treasury team can take advantage of the cultural upheaval that a deal necessarily creates to redefine its charter and realign its organization to better support the needs of the new company. Should the focus of the treasury function be global or regional? Will treasury processing be outsourced to a shared service center? If so, where should the shared service center be located? What resources does the organization require to best meet the needs of the businesses? A strategic transaction creates an environment in which it’s natural for treasury to ask these questions, and in which the treasury function is empowered to redesign itself based upon the answers.
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.
At the same time, a merger, divestiture, or acquisition provides an opportunity for a treasury team to refine its banking relationship strategy and account structures. It can achieve improvements via relatively straightforward initiatives such as creating in-country cash pools, or through bigger projects like replacing a global cash management bank to reduce costs and enhance service. Regardless of the scope of the initiative, treasury needs to carefully consider the costs and benefits of any proposed changes to its banking structure.
Finally, strategic transactions provide a catalyst for refining the organization’s IT strategy—for example, moving from reliance on outdated and/or proprietary systems to third-party vendor solutions. Smart treasury teams take advantage of the deal environment to improve their technology infrastructure in a way that increases functionality while reducing operating costs. For carve-outs, the TSA typically covers treasury technology, so the new treasury team can evaluate its system needs post-close and develop a detailed technology transition plan. In mergers and acquisitions, the two treasury teams that are integrating can use the transaction as an opportunity to select the IT systems from the two environments that best support the business processes and organization of the combined function.
Bringing It All Together
The ability to manage the risks while capitalizing on the opportunities inherent in a strategic transaction is what differentiates a strategic, leading-edge treasury function from all the rest. However, even the most sophisticated treasury departments will find themselves unprepared for some of the challenges posed by mergers, acquisitions, and divestitures. External expectations, organizational impediments, cultural issues, human resources constraints, time pressures, technology complexities, regulatory limitations, and skills gaps—to name a few!—all impact a corporate treasurer’s ability to successfully manage a transaction.
Diligent planning and execution can position a treasury team for continued success throughout the transaction life cycle. A merger, acquisition, or divestiture can present an excellent opportunity to transform the treasury function from a reactive transaction processor to a proactive advisor with direct responsibility for developing and driving company strategy.
Eric Cohen is a principal in PwC’s Advisory Corporate Treasury Solutions practice specializing in treasury and risk management consulting. His expertise includes treasury strategy and operations, treasury and risk technology, working capital management, financial risk management, and strategic transaction support.
Chris Lee is a manager in PwC’s Advisory Corporate Treasury Solutions practice. He has more than eight years of experience providing strategy, process, controls, cash and banking, investment, debt, and technology assistance to companies across a wide variety of industries.