EuroFinance

As 2024 draws to a close, the mergers and acquisitions (M&A) landscape has experienced a significant rebound, according to Morgan Stanley Research. Global M&A volume had dropped by 35% in 2023, marking the second consecutive decline and the lowest level since 2004. This downturn created a pent-up demand for deals in 2024, as companies’ regained confidence in growth prospects and seized opportunities to capitalize on strategies and discussions that had been in development.

Several cyclical and structural factors are expected to drive this resurgence in M&A activity. Non-financial companies currently hold $5.6 trillion in unallocated capital, while private market investors have another $2.5 trillion ready to support deal-making, the Morgan Stanley Research report added. Additionally, companies are focusing on improving efficiencies, expanding market share, and acquiring capabilities in areas such as artificial intelligence and energy transition technology. As private equity firms look to monetize their holdings of over 1,200 unicorns—startups valued at $1 billion or more—the stage is set for a robust M&A year, the report noted.

The 2024 Mid-Year Outlook of Global M&A Industry Trends report noted that the daunting combination of high interest rates, current valuations, and political uncertainty has been a showstopper for many deals. Nevertheless, the strategic need for M&A continues to grow stronger, creating pent-up demand which will be unleashed as these uncertainties resolve.

As companies pursue mergers and acquisitions, whether acquiring competitors or strategic suppliers, the treasury department must integrate new personnel and technologies brought by these deals. The process of assimilating new business units and incorporating additional treasury functions for reporting necessitates a reengineering of existing systems and processes. At the 2024 EuroFinance Global Treasury Americas Miami conference, treasurers discussed critical strategies for aligning operations and merging treasury functions post-M&A, emphasising the need for process and technology reengineering to achieve successful integration.

Treasury’s role in navigating M&A

The role of corporate treasury teams in M&A is crucial and multifaceted, encompassing both strategic planning and operational execution. Amy Lainge, Head of global treasury operations at Warner Bros. Discovery, an American multinational mass media and entertainment conglomerate, highlighted that the process extends beyond just securing funding. “Pre-close there’s the deal, the funding part of it, and then the due diligence phase. then you get to the post-close integrating and operating phases” Lainge noted. Treasury teams are deeply involved in arranging funding and managing the complexities of integrating new acquisitions. The post-close integration can reveal unexpected challenges, which underscores the importance of thorough due diligence.

Bruce Edlund, Group director and assistant treasurer at Cloud Software Group, a technology company specialising in cloud-based software solutions, added that internal treasury dynamics during M&A can vary significantly. In some cases, organisations have a fragmented treasury function where responsibilities are split between treasury and accounting tasks. This often necessitates a reassessment and realignment of roles within the treasury team to address the complexities of the transaction and integration processes.

Lisa Killer, Director of treasury operations at Orlando Health, a healthcare organisation that operates a network of hospitals, outpatient care centres, and other medical facilities emphasised the challenges of managing banking structures during acquisitions. Killer described an ongoing bank conversion process that aims to streamline bank account management as new entities are integrated. However, the process is complicated by factors outside of the treasury’s control, such as delays in healthcare’s revenue cycle and difficulties in accessing bank accounts of acquired entities. “Things move slowly in healthcare,” Killer explained, “so it won’t be until next fall when the new acquisition will be fully integrated into our system.”

Managing accounts receivable and transaction service agreements

Accounts receivable (AR) management is particularly challenging in sectors like healthcare. Killer highlighted the complexities involved in AR due to the multi-layered nature of healthcare billing, involving patients, insurance companies, and secondary payers. Transaction Service Agreements (TSAs) are often utilised to manage financial operations of the acquired entities during the transition period. These agreements help ensure continuity in AR processes but can complicate the integration with additional bank accounts and system adjustments.

In Killer’s recent experience, the integration of an acquisition involved creating new bank accounts and adapting existing banking structures to accommodate the new entity. Despite the need for these adjustments, TSAs can present challenges, such as the lack of timely access to financial information and the slow pace of integration, particularly in the healthcare sector.

Effective cash management is essential during M&A, and technology plays a significant role in this process. Lainge underscored the importance of cash visibility and system integration. The merger process at Warner Bros. Discovery involved integrating numerous bank accounts and adopting standardised reporting formats. While technology facilitated better cash management, it also introduced challenges, such as the need to align financial systems and manage a significant increase in the number of accounts and banking relationships.

Strategic priorities for treasury teams

In light of these challenges, treasury teams should focus on several strategic priorities:

• Cash visibility: Ensuring comprehensive visibility into cash positions is crucial. Treasury teams must manage and consolidate numerous accounts and maintain clear oversight of cash flow.
• People and structure: Effective management of people and organisational structure is vital for a smooth integration. Clear communication and well-defined roles help streamline the transition and address any issues related to the integration of treasury functions.
• System integration: Aligning and standardising financial systems is essential. Treasury teams should prioritise the integration of new systems and processes to ensure that financial operations are efficiently managed.
• Early involvement: Engage treasury teams early in the M&A process to address cash visibility, AR management, and system integration challenges from the beginning.
• Effective management: Focus on managing AR and TSAs effectively to ensure continuity in financial operations and address potential integration issues.
• Adapt and integrate: Prepare for significant changes in bank accounts and financial systems. Leverage technology to streamline processes and improve reporting capabilities.

Edlund highlighted the diverse challenges treasury teams face during M&A integration, from dealing with varying levels of treasury expertise in acquired entities to adapting to new systems. His approach emphasises the need for flexibility, retraining, and clear communication to navigate these challenges effectively.

Conclusion

As the M&A landscape gears up for a significant rebound in 2024, the critical role of corporate treasury teams cannot be overstated. With a combination of unallocated capital and strategic priorities driving deal-making, effective cash management, system integration, and thorough due diligence will be paramount. Treasury teams must be proactive, adaptable, and deeply involved from the outset to navigate the complexities of M&A transactions and ensure successful integrations.