Treasurers have much to consider when preparing financing for a foreign acquisition.
For treasurers, just because the world is getting smaller doesn’t mean it’s getting any less complex. So it goes with acquisition financing on foreign turf.
This is an area rife with potholes and pitfalls for which even the most prepared treasurer must be ready.
That’s because the diversity and differences in economic and regulatory markets around the global pose challenges for treasurers to execute effective financial solutions and carry out smooth post-acquisition integration. It is important to stay ahead of the framework of local markets and customize strategy based on the nature of the acquisition.
At a recent NeuGroup Treasurer’s Group of 30-2 (T30-2) meeting, one member presented an overview of his company’s approach to acquisition financing in challenging markets. Follows are a few of the lessons this company has learned over the years.
Be flexible. Country-specific factors including the regulatory, economic and legal landscapes require country-specific treatment. The company’s treasurer laid out several scenarios in order of preference, starting with cash on hand in local currency to fund the transaction from the local entity, and ending with no cash on hand, no in-country financing option and the need to inject capital, with numerous variations in between.
These options then need to incorporate tax, thin-cap rules and capital structure requirements, which add more layers to the funding process. Members raised the issue of trapped cash in the meeting, but this seems mainly to be an issue in China and India because of their controls. Model flexibility is also important; as another member noted, “run your models in the currency actually in use, not just in dollars.”
Consider all of your funding options. According to the T30-2 pre-meeting survey, most members use internal funding to fund their M&A activities generally speaking, either with equity (65 percent of members) or loans (77 percent). Borrowing locally (29 percent) is the least preferred option, and the presenter explained that for his company, the borrowing costs have typically tended to offset the benefits of local borrowing, particularly in countries like Brazil, where interest rates are between 10 and 12 percent. Another member said his company capitalized the company’s equity offshore and used that to make long-term loans. Banks can also offer ideas on coordinating efforts proactively with regulators to avoid future problems.
Set your M&A financing priorities. Given that the theme of the session was flexibility, members listed several priorities when determining both whether to complete the merger/acquisition and how to fund it, which could be met in various ways. The presenter stated that his company’s final decision came down to internal rates of return on the acquisition and EPS, and that tax was a key issue. Other priorities included future cash accumulation, ability to repatriate, and operational effects. The point was made that it can be challenging to balance P&L impact with the desire to manage economics.
Standardize the internal process for integration. Companies do have control over what they do internally. While there is no standard for expanding into a highly regulated economy, companies can at least standardize their internal processes to make integration easier. Several members said they have designated people who work on integration, in addition to HR, IT and other departments that work with everyone.