Treasury’s role in providing support for mergers and acquisitions (M&A) is evolving from protection of a company’s cash position and assets to serving more as a strategic adviser to the finance function.
Assuming the acquiring company takes on additional debt in this process, the changes in working capital, liquidity and financing of debt all become extra items for the treasury team to manage.
Here we take a look at the practical impacts of M&As to interrelated areas of banking, systems and operating processes through analysis, day one and end-state execution.
Before embarking on a transition of treasury practices arising from a merger or acquisition, it is important for your team to consider the following areas.
1. Banking inventory
Understanding the details of the new treasury operation is key to ensuring an accurate analysis of the current and future state goals. At a basic level, this entails collating full and correct lists of all bank accounts, bank account owners and cash-pooling structures.
Additionally, it is important to list all the banks and the respective services they provide, be it payments, pooling or transactions to keep them on the organisation’s radar.
Once everything is properly itemised and outlined, the team can begin looking for potential enhancements.
2. System architecture and operating processes
An old adage states, ‘a picture is worth a thousand words’. In treasury, however, it is a high-level view of processes that tells a story – particularly one that highlights key areas for improvement.
Overlaying the system architecture to cover all aspects of treasury, specifically the production of cash visibility, will help uncover issue areas and open the discussion of an ideal future landscape.
For instance, is there an opportunity to speed up the generation of cash forecasting?
Are the existing payment processes still right for the new company?
Your team members might have different goals in mind, but this stage plants the seed for important conversations and realistic goals.
3. Design principles, KPIs and goals
When creating a high-level view of processes, it is almost inevitable that redundancy will appear in both banking and systems.
As such, it may be helpful to keep certain principles in mind while analysing the inventory to propose an attainable future state design. For example, consider the following questions:
What is the organisational goal – is it purely cost reduction? Or is there a mandate to make operational improvements, or making the goal regulatory compliance? No matter the reasoning, it is necessary to keep the core business operational while change is enacted.
To phrase it differently, another way to think about this is to establish a set of key performance indicators (KPIs) to act as goals.
For instance, focusing on payment charges per transaction, forecast variance, debt-maturity schedules or bank-fee analysis, and quantifying these into targets that will then help drive decisions around systems, processes and banking partners.
In terms of systems, it is also important to consider downsizing for ease of use.
In the case where a company now owns two treasury management systems (TMSs), determine if one can be retired or operationally reduced.
For example, the team might approach the review like purchasing a new TMS, both outlining a set of requirements and scoring the incumbent systems against them.
Regardless, strive to understand what is needed from the ‘new’ TMS and work from those desires. Post-integration, the team can then consider additional requirements, like a centralised data warehouse, which can support global cash forecasting, or determine whether the system’s role is best placed within the enterprise resource planning system or TMS.
Concurrently, the same exercise should be undertaken for the banking landscape. Here, the expectation is almost always a reduction in the number of bank accounts with an ensuing realisation of cost savings.
Beyond that, a new proposed set of banking relationships is essential because they can best support the global geography of the new combined operation and its functional requirements.
When analysing the banking landscape, the following considerations may assist the analysis: Can one bank handle the majority of the payments required globally? Can the combined new volumes allow a renegotiation of fees?
Finally, it is also necessary to review and document a set of new treasury processes. Where the two treasury teams are to be combined, their policies and procedures must be standardised.
Reflect on any changes to be expected from this unification, like if netting could be part of the new operation or if the approach to intercompany debt must be enhanced.
Ultimately, the desired destination of these best practices is to establish both day one and end-state goals for each of these areas to forge a clear path for execution.
Once a proper plan is in place that takes both current and desired future state analysis into account, the next step is to focus on a smooth implementation.
The team should have determined design principles and/or KPIs for its banking partners, systems and how it will interact with new operating processes.
Working towards the end state while continuing operations is a tricky balancing act for organisations and can be made easier through the best practices set out below.
In any M&A, ultimately achieving the desired end state will take diligent, mindful planning and high-level execution.
Treasurers should take advantage of external help, particularly in areas like system architecture, where the skills to properly analyse are not commonly available in-house.
However, with the right tools and by following industry best practices, achieving a restructure doesn’t have to be extremely difficult.
1. Day one
Engage banking partners and establish project teams early. Utilise the banks to track and execute changes, ensuring banking mandates are updated to fit with new signatories and changes to limits.
Typically, day one systems re-engineer focuses on ensuring the continuation of cash visibility and payment execution. It may be necessary to temporarily shift to a more manual process for cash forecasting.
Where treasury teams stay intact in the short term, processes for day one may largely remain as they are. With day one successfully managed, there is enough time to complete the end-state changes.
These should be sequenced for interdependencies to allow for the resolution of each component and for the company to benefit from incremental change.
2. End state
Bank rationalisation The nature of the acquisition itself has an impact to what can be achieved, such as where cash cannot be repatriated from some countries.
Post-integration, there is likely an overabundance of bank accounts, cost savings and improvements from consolidating the in-country cash pools as well as the set of payment banks used.
As the team reaches the end of one system, decommissioning is typically complex and costly; they may plan by business process rather than system. So, instead of implementing all decommissioning changes at once, strive to do those relative to end-state cash forecasting before payments.
Also use robotic process automation to streamline the data migration of old data to the new systems.
Processes With the end-state solution architecture in place, core operating procedures should now be streamlined and efficient to unlock the ability to implement new functions.
Paul Baram is director of UK office capital markets and treasury at Actualize Consulting
This article was taken from the Issue 2, 2021 edition of The Treasurer magazine. For more great insights, log in to view the full issue or sign up for eAffiliate membership