Treasury at the receiving end of M&A and restructuring

by Graham Buck

Published: 2 October 2018

Whether companies grow by acquisition or shrink by making divestments, treasurers are at the centre of the process. Graham Buck reports.

A challenge faced by a growing number of treasury departments is taking on the consequences of a major acquisition, divestiture or corporate restructure. Speaking at the International Treasury Management conference in Geneva, treasurers from Yanfeng Global Interior Systems and Kuoni Group provided contrasting perspectives.

Edwin Veenman, Yanfeng

Yanfeng Global Interior Systems (YFAI) is one company resulting from the M&A boom of recent years. The world’s largest auto interiors designer and producer, with annual revenues in excess of $8.8 billion, Yanfeng has been a joint venture since 2015, 70%-Chinese owned and 30%-US owned, following a deal between Shanghai Automotive Industry Corp subsidiary Yanfeng Trim and Adient (formerly Johnson Controls).

According to Edwin Veenman, Yanfeng’s head of treasury, despite his company’s name change three years ago resulting from the deal, much work was devoted to comforting suppliers and banks that the business itself was the same, however now with a global footprint, as when it was Johnson Controls in EMEA and North America, enabling Yanfeng to retain the same banking and cash pooling structures going forward.

For companies undergoing such transformations, know-your-bank (KYB) is as essential as KYC for treasury departments, Veenman said. “You could and should expect more from your banks, so leverage your relationships,” he urged his audience. “Your bank needs to fully understand your business model and business strategy.”

This understanding includes appreciating that many businesses could be prone to cyclicality, so that banking support is maintained in a potential downturn and recognising industry trends – such as whether a product/service is mainstream or niche.

Veenman traced the development of corporate-bank relationships, noting that the drying up of market liquidity a decade ago saw many companies reassess their banking structure, with a move towards more of a partnership than a supplier relationship. Corporates should be selective, identifying those banking partners best able to bundle together products and services best suited to the needs of the business.

Among recent developments that Veenman welcomes are Germany’s Bitbond, a global lending platform utilising blockchain technology to connect investors with smaller businesses, the recent collaboration by HSBC and ING on the first live trade finance transaction conducted via blockchain at a cost saving of 40% and the just-announced CHF 100 million funding for the launch of Seba, the first regulated cryptocurrency bank that will be based in Zug.

Asked if Chinese banks are set to become more global, he noted that many already have an international presence. However, the fact that China is a currency-controlled country acts as a restraint. “When the yuan (CNY) is a more internationally-used currency that will certainly assist their further expansion,” he predicted.

One becomes three

By contrast with Yanfeng, Switzerland’s Kuoni Group offers an example of a company heading in the opposite direction. Founded in 1906, the Zurich-based group was a giant of the tourism and travel sector. As recently as 2014 Kuoni reported annual turnover of CHF 5.5 billion but has steadily decreased in size.

Sven Goeggel, E&Y

Kuoni first sold its European tour operator businesses to DER Touristik, reducing 2015 turnover to CHF 3.3 billion and in April 2016 was the subject of a takeover by Swedish private equity fund EQT. The group restructured into three stand-alone companies: B2B accommodation services (GTA); destination services/incoming (GTS); and visa services (VFS). However, EQT has subsequently disposed of two of these three divisions and retained only VFS.

Annemarie Decking, former head of group treasury at Kuoni, joined the group aware that it was to be acquired by EQT and to oversee the restructure into three separate divisions, each with its own treasury department. This involved the respective unbundling of Kuoni’s legal, financial, organisational and financial operations.

She described the action plan in a joint presentation with Sven Goeggel, senior manager, treasury advisory for Ernst & Young, the consulting firm chosen to assist with supporting the treasury separation.

“Treasury is among the most critical processes when an M&A or major restructuring occurs, but too often treasurers aren’t involved early enough in the process,” said Goeggel. “Kuoni was prepared, but it was still a challenging project.”

Goeggel said that an initial meeting established the critical aspects of the three separated businesses that had to be up and running from Day One, of which FX risk was judged to be the top priority. Other major tasks included ensuring that IT could continue to handle cash management and risk management activities, existing bank relationships had to either be adapted or new ones formed, and that funding was available for each of the three businesses.

For Decking, there were six key challenges involved in the transition. These included the same tasks that E&Y identified. In particular, the treatment of legacy FX trades, such as identifying separate FX exposures and moving them to corresponding participants via novating trades.

Then there was bank account and cash pool set-ups, where Decking outlined the challenge of separating existing cash pools and setting up new ones. Next came communicating with business partners: These included banks and service providers, to manage expectations and avoid misunderstandings. Echoing Goeggel, she said that IT was a another major challenge: Here the aim was to copy the existing IT environment as closely as possible into three similar, but separate environments

As a Kuoni manager at the time, Decking also had responsibility for resources and staffing. In particular, not all the treasury team were comfortable with the change and some left the group. Her final lesson was the need to stay focused: Ensuring readiness for business as usual for the first day after the transition was essential, she said.