M&A: 4 Key Areas to Successful Integration of Cash and Risk

Mergers and acquisitions are opportunities to streamline treasury processes, get budget for new technology and demonstrate leadership. However, it is probably the risk of business failure that motivates treasurers the most to implement best practices for global cash, liquidity and risk management in the combined company.

When integrating two companies, treasurers should consider the following:

1.    Centralise Cash Flows

As corporations grow globally, treasury operations become more complex. Consequently, many organisations choose to centralise cash and risk management. As an integral part of centralising cash flows, treasurers have to merge the cash management structures within the combined company and centralise tracking of bank accounts and bank account activity. Bank relationships have to be reviewed and rationalised where possible. New banks in the portfolio have to be connected to the existing technology platform in order to automate the collection of bank statements as much as possible. A counterparty risk assessment should be part of the integration process as well.

2.    Adapt Cash Forecasting

With an understanding of the acquired company´s business, treasurers will be able to identify major categories of inflows and outflows and adapt their forecast structure for longer-term liquidity planning. Additionally, a common framework has to be established that makes it easy for the new subsidiaries to enter and review cash forecasts. Often, treasurers tour around the world to make sure their counterparts in the acquired companies understand the importance of accurate cash forecasting and are willing to provide information in time. After having a global view of worldwide cash flows, scenario analysis, such as FX or interest rate shifts, best case/worst case analysis or shocking the forecast with large inflows or outflows, help to better understand changes in liquidity risk in the combined company.

3.    Establish a Common Risk Framework

In addition to cash and liquidity management, risk management processes have to be reviewed and updated post-merger or acquisition. Therefore, treasurers should put in place a control framework to ensure that exposure management follows a consistent and thorough methodology across the integrated enterprise. This control framework must define responsibilities, policies, procedures and benchmarks, and dictates how the combined companies work together on a day-to-day basis.

4.    Mitigate Enterprise-wide Exposures

Once the control framework is established, treasurers should start taking a closer look at the actual exposures and efficient ways to gather risk in the combined company. Then, they can start analysing: Which exposures are in my portfolio? Is it possible to reduce derivative usage due to natural offsets? What are key risks and how are we hedging them? Are we over-hedging?

In the case of mergers of companies from different sectors, treasury might be pushed into hedging asset classes or products that they have not had in the past. In addition, if commodity risk management is handled in the acquired company´s procurement department, treasurers may leverage the integration project as an opportunity to bring this process into the realm of the treasury department in order to centralise risk across financial counterparties, asset classes and hedging decisions, as well as to streamline lending, syndication, and bank fees.

No matter what the size of the company or the type of industry, M&A is always going to be a time intensive and demanding process. However, innovative treasurers also see the opportunity to grow their scope into new areas, such as commodities, to increase efficiency and control. Through streamlining their operational workflows, treasurers can refine their financial strategies and build the business case for treasury technology that is best suited to support an integrated workflow across entities.