Global M&A hit new highs last year, with the number of deals exceeding 62,000 in 2021, up 24% from 2020, according to a recent report by PwC, with indicators pointing to another “supercharged” year in 2022.
For companies setting their sights on M&A, today’s business environment has called for CFOs with an array of skills to meet both existing and new challenges, alongside increased support from their treasury department.
At Ebury, a fintech specialising in cash management solutions that made its first major acquisition in 2019, Global CFO Jose Esteban says that senior finance leaders play a crucial role in both the evaluation of M&A targets and the implementation of transactions.
The onus is on CFOs to ensure that a target company’s valuation is accurate, not only because it will impact its price, but help define the intangibles and potential contingent liabilities that will be included in its balance sheet, says Esteban.
CFOs must also understand the impact a transaction will have on the business, and its potential to generate synergies that could leverage additional revenues. This is because the acquisition target may cannibalise current business revenues and, therefore, the CFO must consider how any cost efficiencies can maximise the contribution of a particular business line, he adds.
“The CFO must also consider the regulatory impact of a merger or acquisition including the need for regulatory approval; whether the acquisition will generate any change in current regulatory reporting; and how his/her company can meet this new regulatory burden,” he says.
“The CFO is one of the senior managers responsible for ensuring that the M&A transaction follows the company’s governance, which includes getting approvals from company committees, shareholders and also banks and lenders.”
Funding an acquisition
When it comes to funding an acquisition, there are also several important considerations for CFOs, according to Esteban, including deciding on the most efficient funding strategy from a tax perspective and whether available credit lines allow for these funds to be used for acquisitions. The CFO also must understand how a particular funding structure will impact the liquidity of the company as well as covenants and leverage ratios.
For these reasons, CFOs frequently rely on their corporate treasurers to help define M&A transactions and arrange funding.
“M&As will have an important impact on the liquidity and the risk profile of the acquiring company,” says Esteban, noting that if available credit lines are used for funding, this could impact the availability of credit to the company’s other businesses.
“If a company elects to utilise credit lines, the treasurer would have to ensure that this does not breach financial covenants. In the case of a cross-border acquisition, there could also be a currency mismatch between the funding and the purchase price so the treasurer would have to evaluate the need for hedges.”
Download our Whitepapers
Once an M&A transaction is completed, CFOs must also play a key role in integrating the new business and this too often calls for additional support from the treasury function.
“A CFO has to ensure that the new business is properly implemented into his/her company’s platforms, including treasury – funding, cash management and banking relations – as well as finance (accounting); capital management and regulatory reporting and budgeting and forecasting,” says Esteban.
“He/she also needs to measure the impact of any synergies as well as the overall performance of the acquired/merged activity and eventually propose some steering on how things could be adjusted in order to achieve what is required.”
He adds that the CFO is responsible for reporting on risks as well as performance and, therefore, must have constant interaction with business areas linked to a newly combined entity. They must also get updates on the business environment in case adjustments are needed to execute strategies.
Once an acquisition is agreed, treasurers are likely to get involved in plugging the acquired target into the processes, systems, controls and governance of the company.
Here, Esteban points out the treasurer’s role could now typically involve integrating the portfolios of the acquired/merged business, as well as analysis of the new risk position and rebalancing hedges as needed. A treasurer is also responsible for integrating the newly acquired business’ cash accounts so that it can become part of the company’s overall liquidity management.
“I believe that the role of the treasurer has changed in recent years in the sense that technology now plays an important part in how a company manages its risks and how it manages its payment flows,” he says. “The regulatory environment has also changed in recent years, so the treasury function requires a solid control environment and governance.”
He adds that treasurers must also have, and use, their own specialist skills in areas such as risk mitigation; business knowledge and forecasting to ensure a successful integration process.
“A treasurer needs to understand the risks involved – in particular, market risks. As M&A involves the integration of assets and liabilities, he/she would be required to have a view on how the integration will change the exposure of the company and recommend hedging alternatives, if necessary,” says Esteban.
“He/she also needs business knowledge as acquired or merged businesses will bring in new, different or complementary ways of doing business.”
Esteban concludes that once a new business is integrated, treasurers are often required to anticipate future implications, including future funding needs and/or changes in hedging strategy.
“The treasurer is required to fully understand all the processes – including how the systems work – to define a proper integration plan,” he says. “That integration plan will certainly be multidisciplinary and will involve resources from multiple areas so the treasurer needs to be a natural leader in order to engage and organise the different teams to work in harmony.”
He adds that today treasurers are often required to interpret the outcomes from an integration plan and ensure that this fits in with the policies of the acquiring company.
“It is possible that the treasurer may have to engage with external parties – for example banks – in order to restructure the new business’ contracts to fit in with the policies and/or strategy of his/her own company,” he adds.