Treasury due diligence is critical to achieving a clearunderstanding of both your own treasury environment and that ofyour merger and acquisition (M&A) targets.

Whether your business is contemplating or has already announceda transaction, the treasury team needs to carefully review andevaluate all treasury-related details on both sides of the deal.Other groups within your company may have already engaged in, oreven completed, a due diligence process; however, that processdidn't necessarily incorporate the details required to determinehow the organization's bank accounts and cash flows should bestructured once the transaction closes.

Therefore, it's important for treasury to proactively andindependently plan and strategize the integration. Ensuring thatall cash management environments affected by the deal are preparedfor success on day-one after the close will help mitigate manypotentially critical problems, such as delays in payments to staffor vendors, or not being set up to receive payments in all localesin which the combined company does business.

|

Beginning Your Treasury Due Diligence

An effective treasury due diligence process provides acomprehensive appraisal of the existing treasury systems andstructures, throughout your organization and in all the targetcompany's businesses. The earlier treasury is engaged in theM&A transition, the more time the team has to thoughtfullyconsider enterprise planning and change efforts.

As part of a due diligence process, there are some key strategicquestions and answers that contribute to the development of thetreasury integration plan:

1. What are management's objectives for thisacquisition?

It's helpful for treasury to approach an acquisition in the sameway you would approach any other project: Your starting pointshould be developing an understanding of where you are today anddocumenting the details of your current state. At the same time,you need a clear vision of the end point when the merger oracquisition is final so that you can construct your path forward.That begins with understanding senior management's motivation forthe transaction.

Will integration involve fittingthe acquisition target's business into the acquirer's existingbusiness model? Will the acquired organization run autonomously? Orwill some parts of the combined company be integrated while otherparts remain autonomous? Has your enterprise publicly committed tofinancial synergies? If so, over what time frame and across whatparts of the organization?

It's especially important that the treasury organization fullyunderstand all targeted goals, including both timing and duration.You need to know how much you'll be expected to save, by when, aswell as how you'll be expected to deliver those savings. Can youachieve these goals by renegotiating bank fees to leverage thecombined business's increased volumes? Will you ultimately be ableto reduce the treasury headcount of the combined organization byintroducing automation to activities that are currently conductedmanually? If you are using and paying for two treasury workstationstoday, will there be opportunity to consolidate them and use onesystem, thus driving cost savings? These are all importantquestions that the treasury team should try to answer in order todevelop a plan for achieving the desired end result of the M&Atransaction.

2. Who will be the officers and signers of the newcompany?

Officers and signers are those individuals authorized to carryout banking activities at the entity and account level. It is veryimportant for treasury to understand up front how theseauthorizations will be handled in the combined company, becausemost banking requests—whether for a new account/service or a changeto an existing account/service—will require direction fromauthorized persons.

Needless to say, the cash in a company's bank accounts is aprecious asset, so the organization's decision-makers need to bediligent and thoughtful in planning how they will ensure thataccount authorizations are updated and appropriately documented.There is no specific rule or approach for structuring accountauthorizations that is appropriate for every business. Sometimes itmakes sense for individuals from the acquisition target whocontinue on as officers to retain control of the same bankaccounts; sometimes the list of authorized persons for the target'saccounts completely changes.

Regardless of the approach your organization adopts, and thesooner you establish your vision for post-acquisition bank accountmanagement, the sooner you can share that plan with your banks.Sometimes changing account authorizations requires in-countryfilings, making it critical for the treasury team to think throughplans and begin discussions as soon as possible. Early decisionsgive the acquirer a head start in:

• understanding what documentation is required to put theappropriate post-acquisition controls in place,
• receiving bank documentation to effect these changes, and
• executing the documentation for the banks to act upon postclose.

3. What are management's day-onegoals?

Businesses never want a merger or acquisition to disrupt theirflow of revenue or their supply chain. Thus, it's uncommon to seeconsolidation of enterprise resource planning (ERP) systems onday-one. Instead, our clients typically focus on achieving aconsolidated view of, and centralized control over, cash andinvestment balances by the time of the transaction's close.Achieving this visibility usually falls on the treasury department.A straightforward approach involves:

• mapping existing account structures across both entities,including cash and investment balances;
• arranging for day-one visibility, introducing automated and/ormanual balance reporting, as appropriate;
• establishing authority with officer and signer updates, for theaccounts with significant balances at a minimum.

Control and visibility need to be key priorities. The acquirer'streasury group should introduce automation, physical cashconcentration, and full authorization control on accounts, whereverappropriate. Don't forget that security administration privilegeson banking portals represent a control point—they need to be at thetop of your list of priorities to address.

By ensuring appropriate controls are in place as soon aspossible post-close, the treasury team can help deter threats offraud, whether directed at the business by external forces or evena rogue employee seeking to take advantage of the situation.

4. Will you have a transition service agreement (TSA) inplace with your target?

In many acquisitions—especially the sale of a subset of acompany, rather than the sale of the entire company—the acquirerenters into a TSA as part of the deal. This can help ensure thetransition does not disrupt operations in the target. If yourmerger or acquisition will involve a TSA, it's critical tounderstand the terms and duration of this agreement, and the degreeto which it will affect treasury activities. Your plans shouldalways be designed to make sure the target company will beoperating independently of its previous parent, prior to the end ofthe agreement.

Streamlining Data Collection

Once you understand the transaction's big-picture goals, thetreasury team needs to document the current state of the targetorganization in a number of areas. One of the biggest mistakes manycompanies make in planning an acquisition is failing to dedicateadequate discipline and intention to this data collection process.Whether you use a spreadsheet or a checklist, you need adata-collection system that's organized and standardized, and thatcan be easily replicated.

Key items in the evaluation of an acquisition targetinclude:

Corporate structure. Collect andunderstand the entire legal entity structure of thetarget—inclusive of wholly-owned and minority-owned subsidiaries,as well as joint ventures. Document the percentage of ownership foreach business unit. Banks typically require this information whenthey perform “Know Your Customer” (KYC) due diligence, so it'shelpful to begin building this repository right away. It's alsouseful to document the functional currency and average balances ofeach entity.

Banking relationships. Collectinformation on the target's relationship banks, the services eachbank provides, and geographic locations each bank serves. This datashould be a full-enterprise effort, with information sourced fromall functional groups and lines of business around the globe. Usethis opportunity to solicit feedback from the target company aboutthe banks and their performance. In the integration phase, you willtouch all banking relationships, so a detailed inventory of allbanking counterparties will be very useful.

Moreover, the acquirer's treasury team needs to develop contactsat each of the target's partner banks, so that you can keep themapprised of your transition plans and work with them to execute thechanges you're seeking. It's often most effective for the target tointroduce the acquirer to each bank, and to participate in reviewsof the business at each bank, if sharing of confidentialrelationship information is allowed legally.

Bank accounts. An account tracker canserve as the nucleus of data gathering for many treasuryactivities. It can include as much or as little data as isappropriate for your organization. At minimum, you should collectthe following information about each account: the entity that usesthe account; the entity's business segment, location and domicile,and legal entity status; the account's purposes and owner; the bankwhere the account is held, account currency, and bank balance; aswell as determining whether the entity is regulated or restricted.Some trackers also include services tied to the accounts, includingcash concentration. This information will be invaluable as you planshort- and long-term integration, and as you work to understand andchange control of the accounts at the transaction's close.

Visual representations of account schematics and cashconcentration diagrams can also help facilitate an understanding,throughout the treasury team, of the target's cash managementstructures. A picture is often truly worth a thousand words. Youcan enrich these diagrams with arrows to depict cash flows anddemonstrate the entire funding structure, including investments.Such images may prove very helpful as you plan and seekopportunities to physically integrate your organization's cash withthat of the target. They can also serve as a valuable referencedown the road, should you have an opportunity to optimize treasuryand liquidity structures post-close.

See also:

• Managing Fraud and Corruption Risk inM&A
• Risk Management Pitfalls in Mergers andAcquisitions
• Political Hurdles May Impede M&A MegaDeals
• Don't Fall Captive to Self-Insurance Risks inM&A

Global treasury structures. It's alsoimportant to proactively collect information about shared-servicecenters, payment factories, and in-house banks. These advancedtreasury structures can drive efficiencies in a treasuryorganization. If you're not familiar with how they work, but youracquisition target is already using them, ask your relationshipbanks to educate you and help you determine the appropriatestructure for the combined treasury function.

Moving the acquisition target to the acquirer's existingtreasury structure may, or may not, be the right choice. Even whenone organization has a centralized treasury team and the other ishighly decentralized, integration isn't necessarily a task ofsimply centralizing. Decisions about which treasury structures makesense for the newly integrated organization must involvesignificant thought and effort.

Systems and platforms. Your goal inintegration should be to consolidate similar solutions whereverpossible; this may include treasury workstations, ERP systems, andbank portals. Consolidation may be driven by vendor costs, as wellas by the resources required to support multiple systems and theability of partner banks—or other third parties—to integrate intoeach system.

The data collection process should involve an inventory of alltreasury-related systems, each system's function, the line ofbusiness it supports, its degree of integration, and anyopportunities the combined company will have to enhance thesolution. Don't be surprised if the target company has multiplesystems supporting the same function. Regardless of the complexityof the target's IT infrastructure, system integration will taketime, focus, and discipline.

Credit facilities. The acquirer needsto fully understand how each of the target's banks is supporting itwith credit facilities such as overdrafts, trade financefacilities, outstanding bank guarantees, and letters of credit. Youneed to look at these liquidity mechanisms from both the bank's andthe target's perspectives. The business need driving the target'suse of the credit tools may change with the acquisitions, sodepending on the structure of the line, the credit facilities mayneed to change as well. If any facility is no longer neededpost-close, make sure that the target terminates it promptly.

Another issue to consider is whether the change in ownershipmight require documentation with creditors. These discussions canbecome detailed, so it's crucial to document the facts andinventory early, determine the business need both today andpost-close, and work with bank specialists to properly andefficiently address all credit facilities.

Engaging All Affected Relationship Banks

Ask your company's relationship banks about best practices forapproaching treasury integration, especially if you have manypriorities and are unclear where to begin. You don't necessarilyhave to announce an acquisition publicly before you start auditingand reviewing information with banking partners to understand howthey might be able to assist you. Discussing hypotheticalintegration scenarios with your bank can be valuable in earlystages of the planning process.

Once the transaction has been announced, engaging therelationship banks of the acquisition target is also important.Whether or not your company uses the same banks as the targetorganization, ask each financial institution for an overview of thecurrent state of its relationship with the target—when legallypermissible. In addition to giving you a better view of yourtarget's treasury structure, these discussions can help ensurecontinuity of banking services and mitigate the effects of anydiscrepancies or misunderstandings. Sometimes different banks useterms differently, and disparities in understanding could impactfuture operations. For example, if the target says it has a lockboxaccount, is it referring to a physical lockbox or an electronicservice? Leverage bank resources to fully understand what's meantby common terms.

It's also important to pay attention to your target's globalfootprint. Banking practices differ from country to country; localregulatory requirements and language barriers can significantlyamplify the complexity required in treasury structures. It may makesense to tap into the expertise of a global banking partner to helpyour business navigate these complexities, and hopefully to findefficiency across borders.

The more you're able to integrate treasury functions over time,the easier it will be to manage an M&A transition—creatingefficiencies that will ultimately save time and money. Ideally,businesses should always be thinking about treasury efficiencies.Consolidating and centralizing systems can help streamline thetreasury infrastructure, making your business easier to manage.This better positions your company for future expansion throughacquisitions, but it's a goal worth pursuing even if yourorganization isn't considering an acquisition today.

Rhonda Kruman isexecutive director of corporate treasury consulting, commercialbanking, for JPMorgan Chase. With close collaboration pre- andpost-event, she helps clients achieve treasury-related operatingefficiencies and cost synergies. Kruman has more than 35 years offinancial services experience across a variety of roles.