M&A: Mapping the Process of Knitting Two Companies Together

It doesn’t matter whether the M&A business is up and down, if a good strategic fit for the your company comes along, treasury needs to have the capacity to absorb it.

The biggest challenge for treasury in these situations is to act as its company’s deal facilitator, rather than a bottleneck. Just as it played a central role in keeping companies afloat during the financial crisis, treasury will be called upon to support corporate initiatives now; and the greatest risk is not having the capacity to support growth. To help in that effort, here are a few practical suggestions for efficiently tackling an acquisition:

• Pre-planning. Once an acquisition is on the table, send a team to visit the target’s bank relationship managers to understand basics such as bank group structure, legal entity structure, day-to-day operations, cash-flow and liquidity needs. Then compare this data with your own and construct a gap analysis to determine how much effort will be required to integrate the target company. For large acquisitions, meet with the target company’s actual banks to discuss the deal, transition plan, timeline and most importantly, what you expect of the banks. For smaller acquisitions, this process can be performed by phone. 
• Extract crucial information. There is a need for the knowledge possessed by the target company’s treasury team. Dealing with the people who will likely be out of a job can be tricky, if there are instances of hostile employees, the best strategy is to move up the chain of command to get what the desired results. One way to help the transition go more smoothly is to have the treasury team open its operation to the acquired team to give it an understanding of what will happen during the transfer. But until the transaction officially closes, there is little the acquirer can do to prepare the target for integration. The acquirer can make some gentle suggestions prior to it, but ordinarily cannot do anything formal, say experts. 
• Prioritize post-close action items. Put together an action plan to kick in on day one that focuses on any operational gaps or risk exposures you have identified in your pre-planning activity. Address any risks first and then move into a phased approach for integrating using different templates depending on company size.
  Much of the integration sequencing is driven by the tax department, which typically has a timeline for legal entities to be combined. This is not usually in accord with treasury’s preference, which is to integrate all activities and eliminate unneeded bank accounts and bank relationships quickly, while establishing control. In fact, the first treasury objective is usually to add its signatories to the target’s bank accounts. As business units or operations are combined, the acquired company’s signatories can be removed. Similarly, large cash pools can be consolidated in advance of the tax consolidation plan through the use of intercompany loans. Smaller cash pools generally just sit until the legal entities merge. 
• Plan longer-term integration strategies. Slowly migrate all of the target company’s legal entities onto the ERP platform. But be patient as this can take a couple of years in some cases. Accounts payable, payroll and accounts receivable operations get integrated, but bank accounts have to be left open for a time for checks to clear; this also applies to receivable accounts, where customers can be slow to change their disbursement instructions. Hedging activities should be brought into the fold quickly. Therefore it is prudent to look to change hedging policies on day one to get the target company aligned with our strategy and risk tolerance right away. Similarly, the company immediately starts working on investment policy alignment, particularly managing the combined counterparty exposures.

  For the integration to go smoothly the key is for all parties on the acquiring side to act diplomatically to ensure they get what they need.