Post M&A Treasury Integration

Post M&A Treasury Integration

Call date: 3rd Mar 2020

This call was requested by a member whose company was in the midst of a significant acquisition. They wished to benchmark their approach with a selected panel of peers. The participants in this call all had significant experience which they shared generously.

The call was chaired by Damian Glendinning, whose commentary appears below.

If you would like a copy of this report, please get in touch.

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Chairman’s commentary

The challenges and issues with M&A faced by the participants were consistent:

  • Difficulty in obtaining information on the acquired entity before the deal closes
  • As a result, major challenges in being ready to operate effectively on day one
  • Challenges with managing integration post acquisition. These vary considerably, depending on the company, its size, and the size of the acquired entity.

Participants were generous with suggesting approaches and tactics to manage these challenges – but the consensus was that there is no perfect solution.

Pre-Closing Information

Treasury needs to understand cash flows, currency exposures, banking partners and cash management systems before closing, to be able to run effectively from Day 1. This information is very often difficult to obtain:

  • If the acquired entity is publicly listed, or part of a listed entity, the lawyers will typically not allow the sharing of sensitive non public information
  • If regulatory approvals are required, particularly from anti-trust and competition authorities, customer information cannot be shared until approval is obtained.
  • If the acquisition concerns a division, rather than a separate legal entity, the information is often simply not available on a stand-alone basis.
  • Typically, every function in the acquiring company is asking a lot of questions as part of the due diligence. This can create genuine issues for the target entity, where there is usually only a small team answering the questions. In this situation, treasury questions are rarely the highest priority. But, of course, treasury is expected to function smoothly on Day 1.
  • Usually, the business is being sold for a reason. The seller is often not anxious to share information which may reduce the value.

Approaches used by participants:

  • Try to find out whether the target entity uses any of the same banks as the acquirer. The banks are often concerned about potential loss of business, and can be helpful,
  • Remind management (and HR) that payroll cannot be paid unless a banking structure is in place. Paying employees is usually a very high priority.
  • Prioritise the questions, so the really important issues are addressed.                                                                                                                                                                                                       
  • Negotiate with the selling entity for them to continue the cash management operations for a period after closing – this can take the form of POBO/ROBO (Pay/Receive on Behalf Of). This gives time to set up the processes post closure.

Challenges in being Ready

The main issues are:

  • Setting up new bank accounts – it is difficult to manage KYC with no information
  • Appointing bank signatories and directors – again, KYC issues for staff coming across.
  • Ensuring adequate amounts of cash, in the right place, at the right time.

Approaches used by participants:

  • As above, negotiate with seller to manage treasury for a transition period. This requires a high degree of trust, and being comfortable with each other’s credit profile.
  • Set up new legal entities, and open bank accounts with existing employees as signatories. This works for asset transfers, i.e., no legal entities transferred across, just activities, people and receivables and payables. In this case, funding has to be arranged for the new entities, and it needs to be clear where and how the purchase price will be settled. Some kind of in-country settlement is usually required, for tax reasons.
  • Open new bank accounts in the existing legal entities, and then novate them to the acquired entities post closing. This can work, but novation is not well accepted in all countries, and it does not necessarily remove the need for KYC.

Post Acquisition Integration

This is always challenging, largely as a result of the preceding questions. Specific issues:

  • There needs to be clarity on the tax structure and business model, as this will typically affect how treasury is managed.
  • Similarly, clarity is needed on IT systems: will the acquired entity be moved onto the group ERP system? 
  • Does the acquirer intend to integrate the acquired entity, or have it run as a stand-alone business? This will impact willingness to enforce standardisation and integration, which are usually resisted by the staff in the acquired entity. Again, it can be difficult to obtain clear answers to these questions before closing.
  • Sometimes, the acquired entity is a startup. This means there is no treasury staff to implement group requirements.
  • Also, some countries have legal restrictions on sharing data, and many acquired teams resent rigorous and stringent data reporting requirements. It is not unheard of for acquired teams to overstate these legal and regulatory issues, to avoid being centralised.

Approaches used by participants:

  • Keep very close to the tax and legal teams, to understand the intended future structure (principal model vs local ownership of IP, etc)
  • If acquiring small entities, simply decide not to integrate them on Day 1, as any issues will be small ones, from a financial point of view.
  • If acquiring many startups, consider setting up an incubator business unit to house these entities. This can be kept outside the mainstream and run on a less efficient and comprehensive basis. They can then be integrated over time, as opportune.
  • Sometimes, these startups are housed in the retail section of their banks, and not the corporate area. The accounts and relationships have to be moved.
  • During Due Diligence, try to assess the quality and maturity of the treasury team, to decide the amount of intervention required.
  • Have a detailed integration plan with milestones
  • Sometimes, treasury has to accept that treasury efficiency is low on the priority list in these situations. Of course, the treasurer is still expected to run an efficient organisation – but the time to address these questions if often after closing, especially during budget season.

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