Companies announcing bold transactions provide headlines for thebusiness media, but the real—and often more decisive—drama inmergers and acquisitions (M&A) happens outside of public view,during the process of integrating areas such as treasurymanagement.

A 2018 Deloitte study found that nearly 30 percentof businesses are aggressively seeking acquisitions to extend ordiversify their product line, expand their customer base, and/orcapture new technology. As financing costs remain relatively lowdespite recent interest rate hikes, acquisitions are currently apreferred driver of growth for many companies. This deal-making iskeeping treasury managers busy identifying, gauging, and minimizingthe operational and organizational risks inherent in suchtransactions.

When one company acquires another, it will likely inheritdisparate treasury systems and processes, which will presentsignificant challenges for treasury and financial management staff.Problems can mount quickly as a newly merged team works tointegrate all the various areas of treasury operations. Tocomplicate the situation, corporate management often continues theacquisition spree, adding other organizations to the company'sportfolio before the previously acquired firm is fullyassimilated.

This makes it challenging for thetreasury team to capitalize on post-deal synergies that have thepotential to improve the function's operations. Such challengesmight include addressing how corporate changes affect debtcovenants and liquidity requirements, eliminating duplicativeactivities in collections and payables workflows, standardizingtechnology systems, and rationalizing a plethora of bankaccounts.

Integrating multiple fully functional treasury operations into asingle cohesive department can be time-consuming—and evenoverwhelming at times. However, it's absolutely crucial thatcompanies get this right. Because treasury activities are soimportant to corporate financial performance, optimizing operationsof the treasury function can make the difference between a companybeing the hunter or the hunted in the M&A field.

A treasury acquisition strategy that is well thought out, wellin advance, positions the acquiring organization to increase theefficiency of post-transaction integration, reduce the staffresources and costs consumed by change processes, and maximizepotential returns.

Integration Strategy Is Key

Each acquisitive endeavor is different. Sometimes the treasuryteam have the luxury of time pre-close to learn about the financialoperations of the company they are purchasing, but often they donot.

When information is limited pre-close, a group of trustedadvisers is invaluable in helping craft an acquisition strategythat is unique to the specific needs of the acquiringorganization's treasury function. It's worth spending the time upfront to work with accountants, bankers, and attorneys who helpfacilitate M&A transactions day in and day out. Establishing aframework for a well-defined process that makes it easier to foldongoing acquisitions into the corporate treasury model can savetime and money in the long run.

In theory, the key objectives of integrating two treasuryteams—centralizing funds and eliminating inconsistencies in cashmanagement—should improve cash flow and profitability. Butwholesale changes bring risk and costs. In developing anacquisition strategy, treasury managers need to evaluate what workswithin corporate legal structures and focus on those changes thatwould provide the best return on investment (ROI), while taking allrisks into consideration.

See also:

• 5 Drivers of Success in M&A
• Is Your Treasury Organization Ready for anAcquisition?
• Risk Management Pitfalls in Mergers andAcquisitions
• Managing Fraud and Corruption Risk inM&A

Moreover, treasury and finance departments need to maintaintheir day-to-day operations and cash flows while they plan, andthen integrate, in a way that delivers the highest possible ROI tothe newly combined firm. Effective execution requires an actionableproject plan and close collaboration with internal and externalbusiness partners. Here are six key steps finance managers shouldtake to maximize treasury efficiencies post-merger:

1. Come together on your mission, vision, andstrategy. Define a treasury management missionstatement that aligns with the corporate mission and goals. Thisstatement could address questions like:

• Do we have a clear vision of the end-state objectives andgoals?
• Will we strive for complete integration and for standardizationof all procedures?
• Are we empowered to make changes, or do we need to build abusiness case to gain executive support?

In addition, the mission statement should consider whichstakeholders need to buy into changes before they are implemented;what resource constraints integration will encounter (projectmanagement, A/P, A/R, IT); the corporate timeline for companyintegration; and budget goals or metrics that need to beconsidered. To be effective, the treasury department needs to havethe authority to strengthen governance and streamlineprocesses.

2. Outline corporate and finance-functionstructures. It's critical to establish cleargoals for treasury operations before making significant changes.Ask questions like:

• Does the company prefer decentralization, with offices thatcollect and disburse on behalf of one division, or a group offacilities within a single region?
• Or should financial operations be fully centralized, operatingfrom a single accounting office?

Also, consider how you will view the combined company's cashpositions and forecasting. Ask:

• Will we migrate to a single platform to reconcile and managecash, or will we maintain separate systems?
• Will the company use its bank accounts to segregate cashbetween legal entities?
• Or will it use the general accounting system to report the cashof each subsidiary or division?

Finally, consider whether there are cultural differences betweenthe companies that need to be considered when standardizingprocesses.

3. Estimate liquidity and workingcapital. After a merger or acquisition—ormultiple M&A transactions—treasury needs to assess how muchcash the new organization requires to cover disbursements andservice debt. The debt used to fund the acquisition may come withnew financial covenants, and meeting these commitments may requirethe combined business to squeeze working capital out of processes.For example, streamlining cash posting may be needed to drive downthe new organization's days sales outstanding (DSO). Andstandardizing the disbursement processes might extend days payablesoutstanding (DPO) or enable the company to take discounts.

Treasury will need to be prepared to lead the prioritization ofsuch process changes. Knowing the amount of working capital the newcompany will need to fund operations will help you determine howmuch excess cash you could unlock by increasing efficiency acrossthe organization. Then you can use this knowledge to plan how touse any excess cash by maximizing the company's interestopportunity or by paying down debt.

4. Document the various treasurycomponents. Define the people, processes,and technology that will be impacted by integration activities. Mapout all the systems, payment methods, and workflows with as muchdetail as needed. Be sure to ask:

• What operational models do these different entities use forgeneral ledger and banking?
• What customer relationship management (CRM) systems do theyemploy?
• What enterprise resource planning (ERP) systems do they use tomanage supply chains?
• What are the liquidity workflows, and what are theirrationales?

A trusted banking partner may be able to help document workflowsfor different cash management processes, from the collectionchannels to payment methods to month-end reconciliation. Forexample, if the newly combined company will have 20 differentpayroll accounts sending Automated Clearing House (ACH) files, thatis an area to consider consolidating, unless the corporatestructure requires that level of complexity.

5. Focus on the largest inconsistencies wherechange will best driveROI. Maybe some business units arecollecting through lockboxes, some electronically, and some througha website. This situation would require treasury to monitormultiple collection streams, potentially leaving inconsistentreporting in the system and increasing the risk of fraud orunintentional error.

It's not unusual to see a company managing cash flows using alarge Excel spreadsheet that no one is auditing. It even might beeven be named “Jared's Report” after the one employee in charge ofmaintaining it. But if something ever happened to Jared, then noone would know where all the cash could be found.

Once you understand the major inconsistencies in treasuryprocesses between your company and your target, try to determinethe return on changing each workflow. Focus on changing oneworkflow at a time—for example, disbursements in accounts payableor payroll, online collections, or cash concentration.

6. Develop a workflow communications strategy andaction plan. Ask yourself:

• How best can we communicate workflow changes?
• What approvals are needed?

Create a checklist of approvals, messaging, and specificworkflow documentation. Develop an action plan that captures theultimate vision and defines immediate, short-term, and long-termgoals. The plan should list improvement targets along with arollout strategy and communication plan.

Many acquisitions tend to be highly leveraged undertakings, soimproving efficiency in treasury management can make a significantdifference in long-term asset appreciation and revenue. Tightlymanaging, aligning, or consolidating various systems and processesallows for more working capital and additional capacity to borrow.That means better valuations by investors and a solid position forfuture growth.

Christine Tollesonis a Senior Vice President and Senior Director at Capital OneBank. She leads a national team of treasury management consultantsdedicated to clients in specialized industries, includinghealthcare, technology/media/telecommunications, and financialinstitutions. Prior to joining Capital One in 2017, Tolleson spent10 years in treasury management focused on large corporate andnonprofit healthcare companies. She is a certified treasuryprofessional (CTP) and holds a Bachelor of Science degree fromNorthwestern University and an MBA from Wake ForestUniversity. 

Sources:

• “H1 2018 M&A Highlights.” Dealogic: https://www.dealogic.com/insight/h1-2018-ma-highlights/
• “The state of the deal: M&A trends 2018.” Deloitte.https://www.dealogic.com/insight/h1-2018-ma-highlights/