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Reports

Collaboration and Prioritization in San Francisco

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April 28, 2018

By Anne Friberg

To get the most out of FX risk management and M&A integration, treasury must work well with others and prioritize the must-haves over the nice-to-haves. 

At the recent EuroFinance in San Francisco, “Managing International Growth,” which targets fast-growing companies on the West Coast, I had the pleasure of moderating two panels on topics that are important for fast growth: FX risk management and M&A. Several NeuGroup members were among the panelists.

In the first panel, “Taking a Global Approach to FX Risk,” I was joined by Richard Lucero, assistant treasurer at Dolby Laboratories; Shan Anwar, director of FX at eBay; Lacey McLean, senior analyst for treasury capital markets at Expedia; and Peter Shen, assistant treasurer at Gilead Sciences. The second panel, “Making the Most of M&A: The Treasury Checklist,” comprised Larry Goldman, vice president and assistant treasurer for capital markets at AECOM Corp.; Catherine Portman, vice president, treasurer and finance operations at Juniper Networks; and Guy Simons, vice president of treasury Americas at ZF Group. Some of the takeaways included:

  • Centralization works better: “The debate is over” on whether treasury should centralize FX risk management, noted Shan Anwar from eBay. The panel concluded that while knowledge about where exposures are needs to be conveyed to treasury from many far-flung operations and offices, there are clear benefits of consolidating exposure management in one place: strategy expertise, execution scale benefits, excellence in front-, middle-, and back-office in areas like hedge accounting, FAS 52 remeasurement and others. In NeuGroup peer groups, this has been the preferred practice for a long time; key decisions are made at a central level and executed to the extent possible also at a central level and if needed (restricted currencies, for example) locally or regionally.
  • You’re only as good as your data: Visibility—more and more in real time—and forecasting on cash positions and FX exposures across the balance sheet and income statement have been greatly enhanced by technology advances and connectivity to banks. But the quality of the data is still the area of FX risk management that practitioners can’t wait to improve, let alone automate. Counterintuitively, exposures from third-party revenues, like bookings at Expedia, are more reliable than intercompany exposures, which for complex organizations can be very unpredictable. In this regard, the fewer instances of the ERP, the greater the chance of accurate aggregate forecasts.
  • Resist daily accounting rates: Speaking of aggregate forecasts, balance sheet hedgers’ lives are made infinitely more complicated if the company uses a daily (vs. most commonly a monthly) accounting rate. While a daily rate is considered more “pure,” it almost always prompts more frequent adjustments to balance sheet hedges, adding transaction cost and time to the process. Unless you are a financial entity, daily rates are inappropriate and you should push back on accounting on this.
  • The diminishing returns of hedging: Most companies don’t hedge every single exposure but set thresholds according to some risk tolerance level that takes into account the cost and the risk reduction. This level may be $200K for some and several million for others. Increasingly common are analytics that prompt hedges in order of those that reduce overall risk to earnings or cash flows the most.
  • Treasury’s M&A value-add: financing and integration. M&A transactions are not always as successful as predicted when announced, but chances for success are greater if treasury gets involved early in the process to ensure that company cash can be mobilized and external financing secured at a reasonable cost. So, partner well with the business development folks. After the close, the integration of the acquired entity begins and, again, the earlier treasury is looped in, the better prepared it can be to take over as soon as the deal closes without disrupting the acquired business’s necessary operations. Some of the lessons from the panel:
  • If you are a serial acquirer, have at least someone on the team responsible for financial solutions and systems architecture to facilitate M&A integration.
  • Prioritize: Be proactive, be clear with all stakeholders, and balance “critical on Day 1” with “nice to have.”
  • Don’t break anything: Review all legal and banking agreements for compliance triggers and covenants, and identify the right people in and outside the organization who can help ensure nothing breaks.

Next up: I will lead stream 2 on Day 1 of EuroFinance in Miami May 15, followed by an in-depth FX discussion with FXMPG member Shan Anwar from eBay at the San Francisco Treasury Symposium on May 18.

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