A merger or an acquisition is an exciting time for a company. Sure, it can also be nerve wracking and anxiety inducing, but if it’s done right it can provide a springboard for growth that benefits everyone involved.
When it comes to the deal itself and the integration of the two companies after it’s complete, almost no department is as important as Treasury. At the end of the day, treasury mergers and acquisitions integration activity comes down to money, and as a part of the finance and treasury team, you’re uniquely positioned to make the money side work as well as it possibly can.
This is a key shift from the role of treasurers and CFOs in recent years. It used to be that these positions were simply there to monitor and manage the company’s current cash position, and to track asset performance and financial stability.
Now, these roles have developed to become a strategic partner to the CEO and the rest of the C-suite. According to a study from McKinsey, modern CFO’s are now a pivotal component in the growth of a business, with ever-increasing areas of oversight and numbers of direct reports. That means they have a bigger say in how the company operates and expands, with a bigger number of employees following their strategic advice.
And when it comes to growth and expansion of a company, there are few areas that can have a bigger impact than M&A, for better or worse. Getting these major financial moves correct can make or break a company. Get it right and you could have a ‘Facebook acquiring Instagram’ moment for your company. Get it wrong and that could look more like AOL’s acquisition of Time Warner.
So how can a modern finance and treasury team provide support to the executive team when it comes to M&A activity? We’re going to cover just that, providing insights as to how they can provide valuable strategic advice pre-deal, as well as ensuring that the integration process goes as smoothly as possible once it’s done.
1. Why is the Deal Being Done?
The key first step in any M&A activity is to gain a clear understanding of why the deal is being done in the first place. As any good treasurer knows, measurement of financial performance is only as good as the benchmark that’s been set. Without knowing what success looks like, there’ll be no way to assess progress or guide decision making towards it.
This component of the M&A process can and should happen well before the deal is done. Executives should have a clear understanding on what they’re trying to achieve by making the acquisition or merging the company with another.
Does the acquisition target open up new markets? Are there substantial cost synergy opportunities that come with joining the companies together? Does the acquisition diversify the company’s revenue stream in a way that improves long term stability and profitability?
At this stage there’s no right or wrong answer, the key is to identify the potential benefits of making the deal.
The role of the finance team at this stage is to provide some specific context and support to the executives making the decisions. Say, for example, a company is looking to expand into a new geographic region and is considering acquiring a company already embedded there.
Here, you can provide some invaluable guidance as to how this plan stacks up against the alternatives. Is the acquisition a better financial move than simply growing into the region organically? What are the timescales to profitability for each option?
Through the use of forecasts and scenario planning, treasurers can provide senior executives with specific context on how the financials of Option A compare to Option B, providing insights to help aid the decision making process.
Even if multiple options aren’t being considered, treasury can help decision makers ascertain whether their assumptions on the deal are correct. It might be expected that synergies between two companies post-merger will increase profits for both of them, but does the data support this? If so, how long will it take for those cost savings to outweigh the cost of the acquisition?
All of this highlights the value of the treasury department and senior finance executives in the planning stages of any M&A activity. Getting involved early in the process will ensure the decisions being made are informed by data, not just assumptions and guesswork.
2. Managing Risk in M&A
Obviously maximizing growth is just one side of the ledger when it comes to M&A. Forward thinking executives undertake it in order to push the company and expand its reach, but risk needs to be taken into account.
Over the years there have been countless high profile examples of M&A gone wrong, and it has the potential to decimate a company.
The best way to manage these risks is to identify as many of them as possible, and forecast the scenarios if they were to happen. To do this accurately, the finance team needs to play a substantial role. That’s particularly important if the deal will introduce financial complexities that your company hasn’t had to deal with before.
Taking the previous example of a company acquiring a competitor from a different geographical region. Let’s say you’re a US based company who’s acquiring a company in Australia. That deal will introduce a whole raft of potential tax and currency complications which you may not have had to deal with previously.
What are the risks of forex movements to your company’s profits post-acquisition? How would a negative move in forex rates impact the bottom line and profitability of the deal? Are there additional legislative or political risks in Australia that don’t need to be considered in the US? How might different labor laws impact the company in the event of a market downturn and the need to make layoffs?
All of these questions have financial implications, and the finance team can again help shine a light on how they might play out in the company’s balance sheet. By identifying the various downside scenarios, they can be modeled and planned for. Not only that, but the risk premium needed to compensate for these risks can be built into the negotiated acquisition price, allowing executives to make more well-reasoned arguments around their offers.
3. Structuring the Deal
With all the due diligence done and an agreement that it does make sense to go ahead, the next step in the process is working out how to finance it. It’s no surprise that the finance team is going to be hugely important for this part of the process too.
Finance can provide a complete overview of the proposed new combined entity, including the total overall cash position, the forecast revenue and expenses, net profits and growth plans. This will serve as the foundation for any outside financing that might be sought to get the deal done, and can also help decision makers understand how much cash they can afford to part with.
That’s vitally important, because leaving the cupboards too bare can put immense pressure on the company after the acquisition completes. Even in the best deals, it takes time to fully realize the benefits, and the finance team needs to make it clear how much runway is required to allow enough time for this to happen.
4. Managing the Integration
Once all the i’s are dotted and t’s are crossed, now comes the hard part. Taking two companies and joining them together. The financial aspect of the deal is one thing, but HR, marketing, sales and management are all going to have their own challenges with bringing together two different work cultures and making them one.
The treasury department might not be able to help work out which brand of coffee to keep in the employee kitchen, but you can help ensure the financials of the new combined entity are clear and centralized as soon as possible.
This is really where the benefits of modern treasury management software become highly important. There are so many moving parts in every company, but this issue is squared when it comes to joining two or more companies together.
You now not only have multiple bank accounts for the original company, but you have a whole new set of accounts being taken over as part of the acquisition. This means double the logins, double the account numbers and double the transactions coming in and out of them every day.
Platforms like Trovata make this process far simpler. Treasury teams can add and remove additional entities and accounts to the existing dashboard, allowing for a real time view of the overall company’s finances.
Not only that, but you can make payments directly through Trovata. That means there’s no requirement for the finance team to amend their process to make payments for the acquired entity, with everything seamlessly integrated into the platform.
A consolidation process that would take weeks, even months when done manually, can be done almost overnight. That’s a game changer for the integration process, allowing the finance team to spend more time on analysis and strategic and advice, and less time on data consolidation and integration.
Improve Treasury M&A Integration with Trovata
Trovata makes every step of this process faster and easier. Through the use of sophisticated scenario planning and data consolidation features, it allows you to gain a simple overview of an entire company’s cash position on a single dashboard.
That means the ability to run reports, create financial projects and review multiple finance scenarios, all in the same place.
Not only that, but through the use of open banking APIs, that data is updated in real time, meaning it remains accurate and current as circumstances change. When it comes to M&A, clarity is one of the most important aspects to assessing the impact of any deal, and Trovata is the perfect solution to improve financial transparency.
As Niall Burke, Global Treasury Manager for Eventbrite puts it,
“We know the detail we are getting from Trovata is accurate, thus we know what is going into our reports is accurate. This gives us confidence in anything we are building, as opposed to having to combine and cross reference reports.”Niall Burke, Global Treasury Manager for Eventbrite
That accuracy means M&A decisions are made based on the accurate data, and ensures that progress can be measured effectively after the deal is done. For more information on how Trovata has saved companies 40+ hours a month of data entry and reduced treasury management software costs by over 50%, download our platform data sheet.