Squeezing maximum value from an acquisition

Asia is at the forefront of a boom in merger-and-acquisition (M&A) activity, as the region’s corporates scout the world for attractive targets that can provide the rewards of a well-planned acquisition: cost savings, synergies, and a stronger market position.

The value of M&A deals in Asia hit US$984bn in 2015, according to data from Mergermarket, with North Asian countries being the most active. China accounted for the lion’s share, with US$486.9bn in transactions last year. Japan, South Korea, and Hong Kong are also contributing to the growth in acquisition activity. In 2016, the regional flow of deals has not abated, and we can expect to see Asian companies continue to maintain a healthy appetite for M&A.

The actual process of completing a deal is not always straightforward, and a number of events can impede the realisation of a more profitable union of companies. There might be a clash of cultures between the purchaser and the acquired company, or the buyer might discover some unforeseen facts about its target only after the deal is completed.

M&A is often a landmark moment in the corporate timeline, so when a company decides to go ahead with an acquisition, all of its senior staff should do their best to ensure that it is a success. Corporates are also going for larger acquisitions that require an increased level of advanced planning. This means that companies are engaging with banks earlier than before – not just for advisory services, such as understanding and valuing the asset, but also to help with their financing needs and the ongoing bank operational requirements.

Treasury’s involvement

The upshot for corporate treasurers is that they are involved in the acquisition process at an earlier stage than before, and thus are in a very strong position to contribute to the overall success of the deal.

At the earlier stages, the emphasis of corporate treasury is on financing the deal. Acquisitions are complex transactions that typically need to be completed quickly and precisely. Until the deal is about to be announced, the treasurer might only know that the company’s board is looking to make an acquisition. However, when the deal becomes public it is their responsibility to bring together all of the business’s available cash and arrange any necessary financing. This is something that requires extra attention nowadays, as the current regulatory environment is making banks more prudent about how they use their balance sheets.

The best way to be prepared for any M&A activities is to have an efficient cash management system in place, as funds in different subsidiaries or geographies might not be easy to access in a short period of time. Having the right platform for cash visibility and liquidity management, which are often developed with an experienced banking partner, makes it easier to centralise a company’s internal cash and build up the war chest to fund an acquisition. This can reduce the need and extent of external and costly financing: debt. Good cash management can also help minimise the impact that the deal has on the purchaser’s ongoing cash flow.

Other than financing, there are a number of considerations that need to be addressed during the execution of the deal. The treasurer needs to identify which entity is actually going to complete the transaction, the exact routing and any foreign exchange (FX) arrangement of the transaction flow. They must also ensure that the correct account structure is in place and that the transaction complies with all relevant regulatory arrangements.

Once the deal is closed, corporate treasury continues to have a critical role in making the deal a long-term success; especially when it comes to creating efficiencies, driving synergies and enforcing internal control and governance with the acquired company. To get the maximum benefit out of the acquisition, a company should look for ways to truly integrate the treasury and finance operations. Areas to consider include the banking arrangement for the two companies; the internal systems being used and how they can talk to each other; the management of internal control; and alignment of payment terms. Each of these is an area of improvement, which can be achieved by diligent management following the deal.

The process of integration can become more challenging when a company acquires a business that takes a more sophisticated approach to cash management and other treasury functions. This is sometimes the case when Asian companies buy businesses in Europe and the US. However, if the integration is managed well it can offer an opportunity for the purchaser to get insight into and benefit from global treasury best practice.

An M&A deal is a serious process that can have a momentous impact on the future of the buyer. Success is therefore of paramount importance and corporate treasurers should never forget that they can make a real contribution at every stage.

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