Mergers and acquisitions are no easy business. Few get successfully finished and many end in failure. Whether marriages of convenience or military missions, both these generalisations miss the point that money – whether you need it, want it or have too much of it – is the key to success, and treasury must be at the heart of the process.
A militaristic tone often creeps in when discussing M&A with acquisitive finance professionals – talk of operations, mobilisation, targets, missions and orders. That’s no accident. “For us, the rules are actually based on the orders based on a standard Nato template. It makes life easier,” says one UK treasurer of a bio-pharmaceutical company. And what’s rule number one when integrating any deal post merger? “You must secure the cash!”
Nato’s sequence of orders includes: ground (terrain), situation (enemy and friendly forces and your own resources), mission, execution, service support, command and signal and questions. Even if the merger is termed a marriage of equals, there is something of an old-fashioned quality about that marriage. There must always be a successor entity – the assets and liabilities of one company are acquired/ succeed to the successor company.
Sequence of orders
Beyond any checklist – psychology, communication and change management skills are appropriate for any integration.
In 2013 Liberty Global acquired Virgin Media for $16 billion ($23 billion including assumed debt). Rick Martin, director of treasury at Virgin Media was one of the first people to be introduced to the Liberty Global team and was there almost at the outset of the deal. “It sounds a cliché but if you get involved early, it’s a privilege and a tremendous opportunity to help drive value into the transaction both professionally and personally. It’s immensely rewarding, and hard work.”
Luis Montesinos Ballesteros, director of treasury and tax at Campofrio food group says treasury should be involved, “The sooner the better and, depending on the circumstances, treasury should even be part of the decision-making process at a very preliminary phase.” He adds, “Nowadays, no transaction should actually be undertaken without having previously made a thorough appraisal on a number of issues that traditionally fall within treasury’s responsibility: the resulting capital structure and associated financial requirements, liquidity, impact on leverage ratio and eventually on credit rating.”
Scoping the terrain: ground
Treasury often becomes part of the process in the pre-acquisition stage, when the work done is rarely in the public domain. “It depends whether the investment planned is organic or inorganic,” says David Dunkerley, group treasurer at Cable & Wireless Communications. “If it’s inorganic then the due diligence stage will point up certain areas and we will agree work streams involving corporate finance, legal, tax and treasury to take the deal to the board for approval or otherwise. Treasury’s start point is around basics like geography/economic environment, cash management and for an emerging markets company like ours, how do you scope a new territory – this goes hand in glove with tax,” says Dunkerley.
Due diligence also involves a lot of scenario planning on the funding side. “You have to play around – is there an equity implication on your company, or is it going to be cash funded? What does it mean in terms of the availability of funds and also in terms of covenants, does it cancel existing debt and what will be the covenant implications? If we do this deal and cover off, what do we need to scope in terms of consequential points on A, B, C and D?”
Indeed, the danger of breaching debt covenants is always to the fore. It’s a balancing act as to whether the acquired or acquiring company has more restrictive covenants. This could have a big impact when the accounts are consolidated and could easily scupper a deal.
Situation: Your resources
The timing of treasury’s involvement in the M&A process varies for a number of reasons. For David K Waltz, assistant treasurer at an S&P 500 company in the US, the factors that influence this are threefold. The first is who is the owner or driver of the transaction. “A relatively independent business unit may bring them in later,” he says. The second is the size of the deal. “Larger ones usually get treasury in sooner since financing may be involved.” Third is organisational structure. “A strong ‘business development’ or ‘strategic planning’ group with their own resources will manage more independently than if the analytical talent lies inside treasury,” Waltz says. In Waltz’s view, M&A can be likened more to a dance than a marriage or a military operation.
For many MNC treasurers, though, being part of the deal as soon as possible is important. “My top tip,” says Ben Krajcir, assistant treasurer of Brady Corporation, “is to get treasury involved upfront.” Brady Corporation tries to integrate its many acquisitions into a cohesive, responsive and cost-efficient treasury. It has met varying degrees of sophistication in its target acquired companies, from private equity to family-held, and adjusts its strategy accordingly. In December 2012, the company bought Precision Dynamics Corporation (PDC) from Water Street Healthcare partners (a private equity firm) for £300 million in cash.
M&A teams typically involve HR, tax, treasury and finance and IT. Krajcir is also keen for treasury to be involved at pre-close stages to get an idea of the target’s bank structures and operations and also, particularly, to check there will not be any debt covenant violations.
Due diligence checklists can be long, for sure. But the treasury agenda needs to be high on the minds of the team. For Brady Corp it’s not just about the funding, but also to scope out the tech. “I haven’t been involved in a deal where IT kills it, but certainly it’s a significant part of due diligence,” Krajcir says. Brady Corp has been rolling out SAP as their global ERP and they are currently 85-90% SAP, so rapid integration helps.
Along with IT issues, other treasurers highlight different challenges. There are plenty of things that can/should come out of the woodwork which have a financial impact. For instance, intellectual property issues, which if they are not properly accounted for can have a financial impact. Waltz cautions: “Find the fatal flaws early and work to resolve and/or mitigate them. You don’t want the deal scuttled late in the game because of something you’ve found.”
However, there is a question of pace. For some big-ticket deals, ‘sweating the small stuff’ on day one can lead to a lack of focus.
Mission and execution
Day one often has all the glamour. It’s the functional close when funds can be moved. A finance departments’ attention is often focused for months on that one day. Once the deal has functionally closed – the integration process gets underway. Finding and monitoring cash pools is one of the first items on the treasurer’s agenda. Mobilise early and integrate fast are the mantra. But how fast?
Waltz says: “Fast enough to meet the deadlines without messing something up! You don’t want to hold up ‘Day 1’. ‘Day 2’ items are more flexible – think through the business case, the steps required, and do what makes sense with respect to timing and capabilities.” He adds, “In our most recent merger of equals transaction, we couldn’t really implement some of the changes until the ‘boxology’ was completed.”
It’s important to be a part of all the big ticket issues, and for many a ‘90:10’ rule applies to how much can be done at the start. For one acquisitive company the key things include cash and banks, investments, intercompany IP ownership (a particular challenge) and FX (keep it simple is a good rule). This particular company treats M&A as a military process – as soon as possible paying off debt and writing off investments to the P&L rather than holding and ‘cleaning and scrubbing’ the assets/liabilities all before legal entity combination stage.
Brady Corp’s Krajcir is quick to caution: “Don’t forget the details – they are key. Nothing’s more likely to demoralise a company that’s been taken over than the staff not being paid. Payroll is vital.”
For sure, psychology matters. “Don’t overwhelm the acquired company in the early stages,” Krajcir adds. “There are so many things for the new company to take on board, being overwhelmed by staff from the new buyers may not be helpful. Certain things take time.”
Anticipation of change is often scarier than change itself, one treasurer says. “Keys to success include making people realise there’s no going back and that change management involves the high road not the easy road.”
Campofrio’s Montesinos Ballesteros agrees that integration should be as fast as possible, but ensuring that organisation and change management issues are addressed. “It is a very timely opportunity to revise the corporate processes and procedures aiming to attain synergies and enhancements in the resulting company’s working method.”
Lupin has been growing fast, and organically. The pharmaceutical company keeps to a very decentralised model and tries to fund locally where possible. “We don’t send people out from here, we manage locally and give more power to local treasury rather than sucking funds to India. “Selffunded growth gives us a natural hedge,” says Sunil Makharia, who is Lupin’s EVP, finance. “We are looking for acquisition opportunities and have a target of $1.75 billion in 2013, $3 billion in the next one and a half years.”
How did it go?
So many high-profile mergers have been branded failures as they destroy value. What are the metrics used to determine success? These are informed by the objectives that are sought and should fit the situation. Montesinos Ballesteros draws on experiences including the Alcatel-Lucent merger and Campofrio Food Group (CFG). The usual financial and treasury key performance indicators (KPIs) can be used. These include net financial debt (NFD), cash, liquidity, leverage ratio, interest cover, operating working capital (OWC) and operating free cash flow (OFCF), among others.
“I am particularly proud of the CFG merger from the treasury (and tax) standpoint,” he says. “We took the opportunity to refinance the whole corporate debt followed by a tax optimisation project at corporate level paving the way to put in place a much more efficient capital structure, as well as increasing liquidity and widening our banking relationships.”
Waltz says: “Meet your synergy target (savings and cost to achieve) or have a really darn good reason that passes muster within the organisation why you don’t. Meet deadlines. Don’t be the only ‘red’ item on the stop-light chart!”
The last piece of advice is from Montesinos Ballesteros. “You must keep control of the process internally above the involved banks and external consultants. It is important to make a good assessment of the available human resources, management and the eventual implications on the resulting corporate culture.
“The conclusion is that treasury, in the wider sense as I like to consider our function (including OWC, risk management, capital structure, financial strategy) is really instrumental in order for any M&A transaction to be successful.”
Finding the match – Liberty Global and Virgin Media
It’s not every day your company gets the chance to be involved in a merger (at least, if you are the target of one). For Rick Martin, director of treasury at Virgin Media, being part of the biggest media deal since Thomson Reuters in 2007 has been a career high.
“There’s only one treasury team in the world I’m familiar with that I’d put up against ours, and it’s theirs,” says Martin. “I’m very happy with the outcome”.
Liberty Global agreed to buy Virgin Media for $16 billion cash and stock in February 2013. Unusually for an acquired company, the Virgin Media team were involved in the financing of the deal. “It’s been an unusually collaborative process,” says Martin. Just eight working days after the agreement, the teams raised $3.7 billion in bonds and around $4.3 billion in bank loans as part of the package to help fund the deal. The financing was a whirlwind. “We raised eight yards in eight days,” says Martin.
Given the amount of M&A deals that end on the cutting room floor, what made the deal happen rather than not? “Institutional shareholders saw the logic, and both companies admired each other. If debt likes it, equity likes it and management like it, odds are you’ve got a deal,” says Martin. How come the Virgin team were so involved? Martin says it’s because of the nature of the acquisition, and the desire not to destroy value, the bête noire of many mergers. The Virgin Media brand and footprint were part of the integrity of the deal. “Liberty Global didn’t buy us to fix us,” says Martin. “They are great believers in scale.”
In terms of post-merger integration, Martin is finding that the many points of synergy between the companies help. “The two entities are highly cash generative and interested in further cash flow generation. The conversations about how we do things like cash flow forecasting felt a bit as if we’d been copying each other’s exam papers – from the number of weeks we do rolling cash flow forecasting (13) to our overlay strategies. Either we lack originality or we both must have done something right!”