Asia´s growing economies are a particularly fruitful ground for M&As. Multinational companies (MNCs) around the world are looking for the most profitable ways to invest the stockpiles of cash they have built up over the past years. In addition, the risk appetite of Asia´s cash-rich companies has increased. Having been able to leverage the region´s dynamic business environment to grow within Asia, they have since looked to grow outside their domestic markets with overseas investments. Consider three of the most interesting acquisitions in Asia we have seen in 2014:
- In January, Suntory Holdings Ltd said it would buy US spirits company Beam Inc for US$13.6bn cash, making the Japanese company the world’s third-largest whisky company and the fifth- largest malt whisky company by volume. The proposed acquisition is also Japan’s third-largest announced outbound deal of all time, according to Thomson Reuters data.
- On 7 July, the US travel website company Expedia agreed to buy Australian Securities Exchange (ASX)-listed Wotif.com for about US$657m. Being headquartered in Australia, Wotif.com has established offices in Canada, Malaysia, New Zealand, Singapore and the UK. The takeover was approved at the start of this month.
- In January, Lenovo, the Chinese multinational computer technology company and the world’s largest personal computer vendor by unit sales, initiated the process of acquiring US- headquartered Motorola Mobility, with approval still pending. Yang Yuanqing, chief executive (CEO) of Lenovo, stated that “the acquisition of such an iconic brand, innovative product portfolio and incredibly talented global team will immediately make Lenovo a strong global competitor in smartphones.”
Treasurers involved in the early stages of M&A initiatives are in a position to secure a good portion of the money allocated to the project, helping them to establish and implement a best practice framework for global cash, liquidity and risk management processes and supporting technology in the combined enterprise. However, treasurers should also keep in mind the responsibility that is placed on their shoulders. Running out of cash or misinterpreting risk is not an option.
Gain Visibility into Global Cash Flows
As MNCs turn towards Asia for new investment opportunities and Asian corporations shift their focus from domestic to international markets, treasury operations become more complex. Consequently, many organisations choose to centralise cash and risk management, although this approach is fairly new for Asian companies.
As an integral part of centralising cash flows, treasurers have to merge the cash management structures within the combined company and centralise tracking of bank accounts and bank account activity. Bank relationships have to be reviewed and rationalised where possible. New banks in the portfolio must be connected to the existing technology platform in order to automate the collection of bank statements as much as possible. A counterparty risk assessment should be part of the integration process as well. Looking at the above examples, the acquisition of Motorola will most probably challenge Lenovo´s treasury team, as combining bank accounts and consolidating bank relationships of two global operating organisations is certainly no simple task.
With an understanding of the acquired company´s business, treasurers will be able to identify major categories of inflows and outflows and adapt their forecast structure for longer-term liquidity planning. Additionally, a common framework has to be established that makes it easy for the new subsidiaries to enter and review cash forecasts. Often, treasurers tour around the world to make sure their counterparts in the acquired companies understand the importance of accurate cash forecasting and are willing to provide information in time.
Logical next steps would be to establish a common understanding for investment and borrowing decisions and to optimise cash and liquidity management by building common pooling structures, setting up intercompany netting or establishing an in-house bank.
After having a global view of worldwide cash flows, scenario analysis, such as foreign exchange (FX) or interest rate shifts, best case/worst case analysis or shocking the forecast with large inflows or outflows, help to better understand changes in liquidity risk in the combined company. With the acquisition of Wotif.com, Expedia is increasing its footprint in some of its existing markets. Thus, the key challenge for the combined company will probably be to establish a common risk framework and consolidate exposures.
Mitigate Risk on an Enterprise-level
Traditionally, Asian companies have put less emphasis on exposure management. Being part of a global organisation might change the risk requirements within an Asian company that has been taken over by an US or European corporation. But also Asian companies investing overseas might take a closer look into exposures related to FX, interest rates, commodities or regulation, as those might have increased significantly.
Hence, in addition to cash and liquidity management, risk management processes have to be reviewed and updated post-merger or acquisition. Therefore, treasurers should put in place a control framework to ensure that exposure management follows a consistent and thorough methodology across the integrated enterprise. This control framework must define responsibilities, policies and procedures, and dictates how the combined companies work together on a day-to-day basis. Typically, treasurers have to answer the following ‘five Ws’:
- Who has responsibility?
- What is being tracked?
- When are actions being taken?
- Where and how are decisions being taken?
- Why are strategies being chosen?
The next step is to define benchmarks for the control framework. Although these will vary by organisation, common examples include the weighted average hedge rate as well as the effective rate of un-hedged and hedged exposures in a given portfolio. Agreeing on common benchmarks is not only important to align the hedging strategies, but also to avoid over-hedging.
Once the control framework is established, treasurers should start taking a closer look at the actual exposures. Many companies still have fairly manual processes for exposure gathering, which usually involves some combination of Excel and email from subsidiaries to corporate treasury. Bringing together all these manual processes can create some of the biggest headaches immediately following an M&A deal.
However, once enterprise-wide exposures are identified and captured, treasurers can start analysing: Which exposures are in my portfolio? Is it possible to reduce derivative usage due to natural offsets? What are key risks and how are we hedging them? Are we over-hedging?
In the case of the successful acquisition of Beam, Suntory´s exposure structure will probably stay more or less the same as both companies belong to the food and beverage sector. However, in case of mergers of companies from different sectors, treasury might be pushed into hedging asset classes or products that they have not had in the past. In addition, if commodity risk management is handled in the acquired company´s procurement department, treasurers may leverage the integration project as an opportunity to bring this process into the realm of the treasury department in order to centralise risk across financial counterparties, asset classes and hedging decisions, as well as to streamline lending, syndication, and bank fees.
No matter what the size of the company or the type of industry, M&A is always going to be a time- intensive and demanding process. However, innovative treasurers also see the opportunity to grow their scope into new areas such as commodities, to increase efficiency and control. Through streamlining their operational workflows, treasurers can refine their financial strategies and build the business case for treasury technology that is best suited to support an integrated workflow across entities.
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