While 2009 was not a year that will be greatly remembered for an abundance of mergers or acquisitions (M&As) among corporates, 2010 appears likely to change that trend. And within any M&A activity there is a huge burden placed on the treasury departments of both parties to ensure all things consolidate successfully – both before and after any sale is completed.
First, the past 12 months has seen a dearth of deals between companies looking to buy others out for a number of reasons. The economic slump has made credit offered by banks for acquisitions far less available and those companies that are already highly leveraged have looked to reduce their leveraged debts while simultaneously meeting banking covenants. This, coupled with the continued uncertainty within the market, along with not knowing the true health of what one is buying, has been a contributing factor in the slump in global M&A. And while we have seen a number of bolt-on opportunities, alongside some major transformational buys, nothing in 2009 has matched what we saw in previous years. But with a hopeful outlook and more confidence surrounding the equity markets, it seems as though we are entering a new phase of M&A activity. And with this comes a renewed importance in the role of corporate treasury departments.
One aspect that is fundemental to any one company taking over another is that of due diligence on behalf of the buyer. As obvious as this may seem, it is often something that is frequently overlooked, or at least, taken for granted that the advising bank acting on behalf of the acquirer will have ticked all the boxes and assured that all is ‘good to go’. Pensions and medical insurance, for example, are just two things that are often overlooked, or at least not fully examined when an acquisition is taking place. For some companies that are determined to take over a counterpart or rival, they can often fail to take into account these ‘hidden’ liabilities that sometimes add many more pound or dollar signs over the actual amount paid for the company in question.
It is sometimes considered that while a corporate may well know its target’s revenue, EBITDA, profit and other headline figures – which make the company a focus of attention in the first place – it is not fully aware of those other liabilities that may well be on its balance sheet. And it is only through true and thorough due diligence that these figures can be properly exposed and discovered. Without such, any treasury department could find itself taking on a frustrating amount of operations to get these numbers into line. A relevant example of such ill-advised practice can be seen in Lloyds’ takeover of HBOS in the spring of 2009. Lloyds, it was revealed, had done between three and five times less due diligence on HBOS than it would usually have done during any takeover maneuver. While this was not the sole responsibility for the huge losses felt by the banking group in the wake of the eventual takeover, it is believed to have contributed a telling part of it. Had due diligence been fully undertaken, the perhaps such gaping holes not been missed. Cross-border takeovers are generally considered to take on more time as often different practices are undertaken in different regions.
The financing of any deal is the responsibility of the treasury department. In today’s climate of deal structure, whereby acquisitions are financed by a range of different structures, it is becoming more imperative that these structures are observed closely. Similarly, those companies that are being acquired now, and in days to come, will hold debt. How this is managed is essential. The likes of readily or pre-arranged credit lines need to be controlled, while any structured finance arrangements inherited must be parented.
While due diligence may well be considered key in many M&A transactions, this further stretches into other considerations for the treasurer.
On top of liabilities that may be at first hidden to the acquiring company – as stated, these may include pensions; medical insurance as well as foreign exchange (FX) and derivatives practices operated by the target on top of other mark-to-market practices – there are also post-completion practices that need to be put in place.
These include ensuring that working capital finance is available, all banking mandates are changed through authorised signatures and that all banking accounts are properly arranged.
In short, as much as any CEO of any company may perceive an acquisition as a grand way to build a business – and in these days, cheap opportunities are only around the nearest corner – the cheapest option could well become less so on closer inspection.