Making M&A Add Up for Treasurers

Mergers and acquisition activity is again on the rise following stabilization of the financial crisis and a build of cash balances by companies within a broad spectrum of industries. Treasurers are playing a key role in the success of these M&A deals, deploying the full range of Treasury best practices, consultative services and technological tools to ensure a successful execution at close and an efficient post-close integration of treasury operations.

A recent online seminar by J.P. Morgan Treasury Services provided an overview of the current M&A environment and M&A best practices. During the seminar, a survey on how M&A transactions impact treasuries was conducted, with 115 treasury executives, primarily from large corporations, responding. Highlights of the M&A best practices seminar are reviewed below.

M&A Activity, Which Is Cyclical, Is Now On An Upswing
Intense M&A activity up to 2000 was interrupted by a recession; an even bigger run up to 2007 was interrupted by the financial crisis and subsequent economic uncertainty. “There are now strong signs of recovery. In fact, for the first eight months of 2010, M&A volume is up 25% year over year, both in the U.S. and globally,” according to Vineet Seth, Executive Director with J.P. Morgan’s Investment Bank M&A group. “We are starting to see that funding is available, the markets are opening up, and M&A activity is on the rise.”

Early Involvement by Treasury Is Crucial
Companies now recognize the importance of involving treasury early on in an M&A transaction. Almost half of the survey respondents, 44 percent, said they had been brought into an M&A transaction prior to public deal announcement. Historically, Treasury groups were brought in after the announcement, but prior to the deal closing.

Documentation and Control of Cash Balances Are Two Key Steps
Seventy-six percent of the respondents said the two greatest challenges during the pre-close phase were to ensure documentation was in order and to attain full visibility and control of cash balances. “Treasurers should take the lead in forming a project management team immediately following a deal announcement to help ensure all documentation is put in place - including such major stake holders as Finance, Accounts Payable, bankers and vendors,” advises James McKenzie, Executive Director with the J.P. Morgan Treasury Services Global Advisory Solutions group. “While getting your banking documents in order is critical, the other key is establishing visibility and control of the merged company’s cash from day one.”

Initial steps should include sharing information, mapping existing banking structures and flows, and identifying cash and investment balances for the separate treasuries. When planning the merged treasury, treasurers need a clear view of – and authority over – significant balances and accounts. Automated treasury reporting tools, such as J.P. Morgan’s ACCESS portal, provide real-time visibility of cash and can significantly streamline preparations for closing.

Banking Partners Can Play a Crucial Role
Closing day of an M&A deal is full of complexity for treasurers, most of it arriving in the form of different types of cash flows — merger proceeds, shareholder payouts, capital injections, debt repayments. Execution of the deal can be jeopardized by the failure of cash to move smoothly. Banking partners, such as J.P. Morgan, can bring considerable consulting expertise to treasurers planning their closing day execution, from helping minimize the number of banks involved in cash transfers to setting up foreign exchange transactions at pre-negotiated spreads. The right consultative banking relationship — both on the investment banking and treasury management fronts — can do much to help treasurers in all stages of the M&A process.

Opportunities to Achieve Synergies Abound
When asked to identify the greatest opportunity to achieve merger synergies, 55 percent of the seminar attendees cited cost reduction in the areas of headcount, administration and facilities. Certainly, big mergers bring big expectations, and treasurers not being exempt are often under considerable pressure to find savings within their own function.

Creating economies of scale, consolidating banking relationships and account structures, leveraging technology, improving business efficiencies and working capital optimization are all paths treasury can take when making a contribution to synergy. Quick cost savings and efficiency improvements can come from the integration or consolidation of banking services in the investment, receivables and payables areas. Longer-term projects can include regional solutions to make better use of trapped cash in regulated countries and negotiating better pricing with banks based on consolidated volume.

To hear a replay of the online seminar “Making M&A Add Up,” click on the "Mergers & Acquisitions" tab here.