The Next M&A Deal: Are You Ready?

By Bryan Richardson

Smoothly integrating an acquired company’s treasury operation requires solid planning and processes. 

Acquisitions have been fewer over the past few years, but with the economy slowly coming out of its doldrums and balance sheets bearing sizeable war chests, it is inevitable that the pace will pick up. When that time comes treasury will need to be ready to not only get the mechanical steps covered but also to add value in the process and ensure the project runs smoothly and on time.

The topic of M&A integration is popular on NeuGroup agendas. Some members have developed an M&A playbook that they reference when needed. Following are some of the key highlights from the many discussions that can serve as the foundation for your own playbook:

• The value of a playbook. While every acquisition is unique, a general guide outlining integration steps and decision trees related to size, geography, operation, etc., can help in sequencing thoroughness to ensure a critical step isn’t neglected. It is important to identify the major risks and opportunities, along with specific integration steps to ensure timely, accurate process integration. Include specifics on who from the acquiring organization will take primary responsibility for key operations of the target company. Consider having the treasury-related playbook integrated into the overall corporate playbook so that appropriate interdependencies are identified and addressed. The playbook should address the full lifecycle of M&A, from pre-offer due-diligence to post-closing operational integration.
• Tailor your approach to the target type. The characteristics of the target company impact the process and approach to the integration. Whether the target is domestic vs. international, large vs. small, centralized vs. decentralized, these variables will determine the specific approach to integrating the company. A flexible playbook developed for a variety of scenarios is all the more helpful.
• Don’t underestimate cultural differences and internal perceptions of the target company. The role corporate culture plays in a successful integration project cannot be overestimated. One regional treasurer described two dramatically different acquisitions that occurred within one year of each other. One company was very proud about its business and abilities and wasn’t supportive of being acquired, while the other company was being sold by a parent that simply needed cash. The second company was just glad that someone wanted it and therefore was supportive and cooperative. Consequently, the second company integrated very smoothly, while the first company, “after nine years, is still problematic,” the treasurer noted. The lesson here is to have a clear understanding of the attitudes within the company about being acquired. According to another company treasurer, “One of the goals in an acquisition is to win hearts and minds at the target company.”

Clearly cultural differences can greatly hinder, if not ruin the effort. The issue is so critical for one company that their treasurer noted “the culture question always trumps the strategic opportunity.” Being a bad fit culturally is a non-starter.

• Be honest with the target company. The regional treasurer blamed a lot of the integration challenges on the initial message communicated to the target company versus the reality. “They were told essentially it was a merger of equals or a joint venture, when in reality they were being acquired,” she said. The target company became frustrated with the contrast between the reality and what they were told. “If they would have just said up front, ‘you are being acquired,’ we know how to deal with that,” the treasurer said.

Successful integration of operational activities, therefore, can depend on the quality of communication between companies. It is important to keep the lines of communication open and to give due respect to the target company so that each side focuses on what’s best for the combined organization.

• Arranging payment for the target. The first order of business once a target is identified, even before an offer is made or accepted, is to determine the best way to pay for it, i.e., what part of the balance sheet should be used. Treasury should be a key member on the M&A team and should address the funding questions well in advance of any deal offer. Capital structure questions and alternative funding strategies should be vetted well in advance of “decision to purchase.” There are numerous considerations to make depending on the payment method as well as other financial considerations to address:
  • Is there a need for escrow? If you pay cash for a foreign firm, some countries require it to be escrowed. The escrow account may be held in USD or the currency of purchase, so be sure you allow sufficient time to get escrow accounts established and currencies traded, if necessary.
  • Using debt. Can you use existing capacity or should it be new financing? Existing covenants should be carefully reviewed so that proper steps are taken to notify current bank members and seek approval, if necessary.
  • Other considerations include:
    • Should you pay off or absorb existing debt of the target?
    • Managing the reaction of rating agencies, bonding companies and pension trustees.
    • Ensure a strategy for accessing offshore cash. You have purchased an EBITDA so it is important to know how you will get your investment back.
    • Necessary hedges if the purchase price is a non-functional currency.

     

   

• Performing thorough due diligence. Due diligence should be a big part of a playbook as there is much to review. Some of the most critical areas to be examined include reviews of the targets’ liquidity status, debt status, risk exposures and internal controls:
  • Liquidity. focuses on cash-flow patterns, particularly against plan, revolver activity and other potential requirements on cash such as unfunded or underfunded pension liabilities. This can actually be an indication of other warning signs.
  • Debt. Focuses on items such as “change of control” language in contracts, off-balance sheet debt/contingent liabilities and parent guarantees. Related party transactions appear frequently in small company acquisitions with a common example being the company owner also owning the building. It is important to understand the targets’ financing needs.
  • Risk exposures. It is important to understand any derivative portfolios and hedges that are in place. The targets’ credit commitments could have an adverse impact on your own credit agreements. On the positive side, some of their exposures could offsets to yours.
  • Internal controls. Starting with the presence, or worse absence, of documented policies and procedures, it is important to review them to ensure they’re adequate and that undue risks don’t exist in the current operation.

   

• Electronic data room is best practice. Most members agreed that they are most often using an electronic data room, where all due diligence documentation is warehoused including due diligence reports that are written throughout the process. Some companies use both electronic data room and a physical conference room.
• Documentation tools are critical. Many companies have developed tools such as a pre-close process questionnaire, deal sheet, and contact list to help treasury communicate with other departments as part of the integration process. They keep the basic documentation on file and continue to update it with new questions they may have learned from previous acquisition integrations. A thorough questionnaire can be quite lengthy with one companies being over 200 questions.

Key Tactical Questions

• Create strong integration timelines. Integration timelines marking critical timeframes based on pre- and post-close dates, with a checklist of activities incorporating various process and system documentation deliverables. Some believe the 60 to 30 days pre-merger in the timeline is the most critical phase.
• Integration Phase 1: Day 1 top priorities post-close. There are operational and legal activities that need to occur or be assured of on the very first day of the acquisition close to ensure the business continues to run smoothly and effective controls over high risk areas are in place. However, in order to avoid an unforeseen problem, one treasurer has a rule that “nothing gets unplugged unless you know you have something in place that will work.”
  • Liquidity. There must be uninterrupted access to liquidity. The acquired business must be able to continue to collect revenue, pay vendors and pay employees smoothly. Note: Moving employees into a new company resets FICA. Therefore, it is better to leave them in their current entity. Debt structure will need immediate attention to ensure no breach of covenants, inter-company funding is executed and access to capital is secure.
  • LCs, bank guarantees and other bank obligations. You will likely need to modify the legacy target facility or use the parent facility. Banks have been known to change their mind on commitments at the last minute and unexpectedly require
    a payoff.
  • Bank account signers. Some people have a rule that you have to get control of all cash on day one. However, for sizeable acquisitions, this just may not be practical as there is very little you can do in advance of the close to prepare for this. A deadline of 15 days for this action is recommended.
  • Impose authority. Transferring your governance to the acquired operation quickly is important to getting the new company on board with the new rules of the game. This includes bank signing limits, internal approval limits, and FX guidelines.
  • Start communication and data flow. This is of paramount importance to winning the hearts and minds of the acquired personnel. Immediately include the new staff in communications and routine reporting activity.

   

• Integration Phase 2: Methodically folding it in. Once the critical activities are covered, you can begin the longer-term, bigger picture efforts to integrate the new assets.
  • Staff retention. Necessary for both the integration process but also for keeping key talent or expertise that may not be in your own organization. Judy cited an experience where 50 percent of the staff left at the point of the share purchase agreement (SPA) and another 20 percent over the following six months.
  • Evaluate for operational improvements. Don’t assume that what you do is best-in-class. It is prudent to review the acquired operation for improvements in process, policies, systems, contract terms.
  • Review authority levels and other guidelines as knowledge of the entity grows. It is a new organization and consequently new operational parameters may be in order.
  • Increase treasury’s value. Take advantage of these events to build the perception by others of treasury adding value to the process and the organization at large.

   

• Look to your banks for help. BNP Paribas’ Warren Eckstein gave a brief review of BNPP’s recently acquired abilities. BNPP acquired Hill Street Capital in 2010 to expand their ability to provide North American M&A advisory services. With this acquisition of Hill Street Capital and internal initiatives to become more globally integrated, BNPP is better able to broker acquisitions of companies both in the US and globally.

An acquisition has a lot of cracks that important tasks can fall through. For highly acquisitive companies there is no substitute for an organized and documented process map. Each acquisition is different, even for the same acquirer. Corporates should maintain a consistent vision and integration philosophy while at the same time remaining communicative and flexible in customizing their playbook to suit each transaction. Integration is a living process that is both standardized and flexible, with consideration to the target company and circumstances.