Capital allocation-related projects, especially increases to share buybacks and dividend payouts forced by activists, dominated The NeuGroup’s Treasurers’ Group of Thirty (T30) meeting in early October. Adding to these pressures, members said, has been the constraint on liquid capital created by US tax rules that impedes US corporates from tapping offshore cash for domestic use.
T30, meeting in San Francisco on October 8-9, also discussed working capital as a driver of firm value, reacting to the end of the dollar carry trade in approaching developing market currency risk, as well as the compliance demands of an array of recent regulatory requirements.
Among the other key takeaways:
Off-shore M&A needs to make strategic business sense. The US Treasury’s anti-inversion rules only underscore the requirement that offshore M&A transactions make sense for strategic business reasons. Taking advantage of tax planning to create the optimal post-acquisition corporate structure is only fulfilling fiduciary responsibilities to shareholders.
Rethinking supply-chain and customer experience, too. Retailers in the group are looking at the supply chain, in both financing and driving greater efficiency overall. Complicating the picture is the drive toward omni-channel distribution where they are selling on-line and in stores, delivering to and servicing customers as they the customers choose. Others spoke of creating one customer experience across all channels. This is forcing lead times to shrink and building in greater flexibility into supply chains. Localizing is a part of this, too, and treasurers are looking to use this to build in more natural hedges and reduce financial risk as they expand into new markets.
Benchmark working capital against peer companies in your sector. In order to set the tone of working capital improvement, Meeting sponsor HSBC’s working capital advisory team suggest that members benchmark key working capital metrics such as receivables, inventory, payables and cash conversion days against their peers. To jump-start this process they offered to perform free starter analysis to any T30 member requesting it.
The focus on ROIC prompts reexamination of surplus cash. Apart from activist pressures to return cash to shareholders, the focus on ROIC as a value driver further highlights the drag excess cash represents on balances sheets in this low-yield, rate environment.
Prepare for exposures surfacing on cash and net investment positions. Here, too, cash on balance sheets hurts. Translation risk on trapped cash balances and net investment positions will grow more visible as negative carry continues. Treasury will be under pressure to mitigate this visible negative by looking for innovative ways to get cash out of negative carry emerging markets (and into USD) or limit the impairment of local currency assets.
Finally, a discussion of compliance-related issues introduced by recent banking and tax regulation prompted analysis of anticipated increased headcount needs and other efforts by banks. Bank regulation is driving much of the compliance burden, and to help mitigate the burden by creating dedicated middle-office, banks are hiring “compliance” relationship managers.
The meeting, particularly the projects and priorities discussion, outlined the major tension facing large-cap treasurers today: having survived the financial crisis and reacted in its aftermath, they are now forced to balance financial strength, support of changing business models, plus compliance and activist demands on cash all at once. And, all the while, US MNCs face powerful disincentives to use the pockets of cash growing off-shore to finance this balancing act at home. Something has got to give.