Treasury Present and Future: Natural Resources and Utilities M&A
Natural Resources and Utilities (NRU) is currently one of the most dynamic sectors for M&A globally, with most regions
experiencing high deal levels. This has knock on implications for NRU treasuries that need to be addressed both now and in the
longer term. Lance Kawaguchi, Managing Director, Global Sector Head, Global Banking Corporates, Global Liquidity and Cash
Management, HSBC, examines these implications and some potential treasury strategies to address them.
Treasury PresentHow does M&A activity impact treasury?
M&A activity affects corporate treasury in multiple respects.
In the general sense, it results in a palpable increase in
workload. More specifically, it will involve handling a raft of
bank relationship and bank account management changes,
such as the opening/closing of potentially multiple accounts.
One of the consequences of this is the need to change
signatories and bank mandates in accordance with the new
corporate leadership structure, possibly to an extremely tight
timeline.
The overall liquidity position of the corporation may also
change appreciably. Treasury may have to adapt rapidly to
a shift from the corporation being cash-positive to cash-
negative. Even if that is not the case, treasury may have to
manage the orderly release of off-balance sheet liquidity from
investment instruments with contractual notice periods in
order to partially or completely fund the acquisition up front.
Alternatively, if an acquisition is funded by external debt, there
will be time pressure to release as much surplus liquidity
as possible from the acquisition to pay down this debt and
minimise interest costs. More generally, existing liquidity
structures may need substantial adjustment to accommodate
new markets and currencies, or the removal of those markets
and currencies in the case of divestments.
On the technology front, treasury may find itself post-
acquisition having to contend with legacy systems and/
or multiple ERP systems (and versions thereof) plus
their integration with existing technology. In the case of
divestments, treasury technology may require cloning to
enable the independent operation of the divestment.
The importance of treasury involvement in M&A
Apart from the immediate consequences for treasury of
M&A activity, there are more general corporate reasons for
involving treasury as early as possible when such activity
is in prospect. One example is the need to ensure existing
financial operations are not disrupted during the M&A activity,
such as a divestment’s ability to pay suppliers and operate
normally from its first day post-divestment. By the same
token, an acquisition will have legacy bank accounts and
infrastructure, in which liquidity may remain trapped until
treasury has full visibility and control.
Many treasuries have also started to assume a broader risk
management role, beyond purely financial risk. Therefore,
early treasury involvement will also improve treasury’s ability
to advise on operational risks before, during and after M&A
activity.
NRU M&A: Global Themes
The global M&A environment in which NRU treasuries
must execute is highly active at present, with the decline in
oil prices since early 2014 a major factor. One response to
weaker oil prices has been for companies to streamline their
operations wherever possible, such as through the sale of
non-core assets and operations. In several cases, buyers
of these assets are looking to use any acquisitions as also
an opportunity to diversify and access new markets. Two
examples of this would be Chinese NRU corporates investing
in Europe and US NRU corporates buying Asian assets.
Treasury Present and Future: Natural Resources and Utilities M&A
1http://www.bloomberg.com/news/articles/2016-04-24/low-crude-prices-to-spur-more-m-a-deals-in-oil-gas-after-slump2http://www.researchandmarkets.com/research/wk4xk8/global_bankruptcy
Certain subsectors within NRU have had to adapt to
considerable financial changes. For instance, oil field services
companies have seen a major fall off in business due to low oil
prices and thus reduced exploration/production activity, which
has also resulted in an associated increase in their working
capital requirements.
More generally, the global NRU environment has placed
further liquidity performance pressure on treasuries as the
“lower for longer” outlook on oil prices has become more
widely accepted. This is an area that treasuries will typically
always seek to improve, but at present the pressure to do so is
particularly acute. However, at the same time, cost-cutting is a
major priority in the NRU sector so treasury teams are lean and
are very likely to remain so: doing more with less is now the
new normal.
Natural Resources and Utilities M&A: Regional Themes
In addition to the global themes outlined above there are also
a variety of region-specific themes that have a bearing on
regional M&A activity, as well as corporate treasury.
In Europe, the relative weakness of EUR versus USD makes
inward investment in NRU assets attractive. Nevertheless,
this has not as yet translated into greater M&A activity for a
number of reasons, such as the gap in perceived valuations
between buyers and sellers. Interesting, although EUR has
been relatively strong versus RMB, this has not depressed
interest from Chinese buyers.
For US NRU corporates, strong USD obviously makes
acquisitions more cost effective, and some are treating this
as an opportunity to diversify into Asia by acquiring assets
there. Other trends include a focus largely on upstream deals
(representing some 45% of all North American deals during H1
20161) and the acquisition of technology assets.
By contrast, NRU M&A activity in MENA has been largely
intra-regional, with USD6.99bn of deals in Q1 20162, although
there has also been a trend of national oil companies acquiring
assets in Asia. Much of the activity in MENA has originated
in UAE: for instance, the government in Abu Dhabi saw three
corporate consolidations in past three months - two of them
involving oil and gas. Kuwait has not been far behind UAE in
terms of NRU M&A volume, while in Saudi Arabia the focus
has been more upon reducing reliance on the oil and gas
sector. More treasury-specific trends have been a drive for
some NRU corporates in the region to enhance their treasury
technology, which typically lags that seen outside MENA.
In Asia, Chinese national oil companies have made clear their
continued interest in outbound investment, with the One Belt
One Road initiative3 being a case in point. Elsewhere, inward
investment has seen a number of non-Asian MNCs seeking
to diversify by acquiring smaller assets in Asia. From a non-
Asian treasury viewpoint, the region remains challenging, with
diverse regulations, currencies and business practices adding
complexity to any onboarding and integration of acquisitions.
Post-M&A treasury considerations
Once a merger or acquisition has closed, treasury will be faced
with a number of challenges. One of the highest priorities is
gaining visibility and control of bank accounts and relationships.
If this can be achieved, then the operational risks associated
with personnel movements are minimised.
In addition, treasury will then also be well-positioned to access
any surplus cash within the acquisition. This is crucial when
acquisitions are funded by capital markets or bridge financing
as it enables debt to be paid down faster and interest costs
minimised.
A further consideration for treasury is that a merger or
acquisition often does not stop there. It is not uncommon
for periods of M&A activity to be followed by periods of
divestment. This is a further reason for treasury to be well-
briefed on the detail of potential M&A activity. If a business
unit within an acquisition is already identified as non-core for
early disposal, treasury clearly does not want to waste scarce
time and resources on incorporating it into liquidity structures.
Another potential issue for treasury post-M&A is unfamiliar
geography. An acquisition or merger may involve new
regions or countries where regulation, currencies, financial
infrastructure and business practices are unfamiliar. Under
these circumstances treasury will have to surmount a steep
learning curve if potential problems or errors are to be averted.
Leveraging bank expertise
Unfamiliar geography is a classic example of where partnering
with a suitably qualified cash management bank can prove
invaluable. If the bank has a global network presence, it
will be able to provide detailed information and solutions to
accommodate local nuances. The challenges associated with
understanding new markets and the rules associated with
managing bank accounts and liquidity therein can thus be
minimised.
At a strategic planning level, if engaged early, this type of bank
can also add value to the process of developing objectives,
such as any transformation/optimisation agenda. The same
global network expertise can be equally valuable in project
managing the integration of bank accounts.
Finally, if the bank concerned can also provide ERP and
treasury management system expertise, then there is also
the opportunity to maximise the planning and execution of
automation in the project. In a cost-pressured environment,
this can be a significant benefit.
1http://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf2Gulf News (04/04/2016) http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.17037043https://ig.ft.com/sites/special-reports/one-belt-one-road/
Published: November 2016
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Treasury FutureDigitisation
Looking to the future in the NRU treasury space, one theme
that stands out is greater digitisation. This has the potential
to transform M&A activity for the better, by compressing
timelines, reducing costs and minimising labour-intensive
paper processes. One obvious example of this is account
management, which is usually a major activity post-M&A. At
present, a lengthy manual process of onboarding with new
banking providers has to be undertaken. Digitisation of the
platforms and processes involved in onboarding, could go
a long towards remedying this. This could simply take the
form of electronic submission of documentation or enhanced
systems that can make more extensive use of information
already held in order to minimise duplication of effort.
Know Your Customer (KYC) processes are another area that
can prove a bottleneck post-M&A. Again digital technology
and data management can be used to improve the experience
from a corporate perspective. In addition, regulatory changes
can be more effectively incorporated in modern technology
platforms, ultimately simplifying and improving the onboarding
experience. Another recent innovation that can assist here is
collaborative KYC, with KYC.com and the SWIFT KYC registry
being two examples. This can help to automate the KYC
processes, including the verification of companies, people
and ID documents. A single centralised secure database that
maintains KYC profiles is far more efficient than individually
delivering documents to various banking partners.
Nevertheless, taking maximum advantage of this sort of
innovation necessitates a willingness to change on the part
of banks. Only those banks that are genuinely committed
to innovation and change management will be in a position
to deliver the sort of streamlined digital experience that can
minimise corporate treasury’s workload post-M&A. That in
turn necessitates the elimination of legacy processes and
technology and the efficient redeployment of existing data
onto new technology.
Technology Integration
In addition to account management, another major area of
treasury activity post-M&A tends to be systems integration.
Especially when a larger corporate acquires a smaller business
or business unit, the likelihood of both entities already running
identical financial systems is low . This means that some form
of data exchange between the systems must be established
as quickly as possible if treasury is to have the degree of
financial visibility it needs for effective risk, cash and liquidity
management. The snag here is that because treasury is still
perceived in many corporations as a cost centre, it tends to
be near the back of the queue when it comes to obtaining
corporate IT resources, which in any case may have limited
knowledge of legacy financial systems integration.
This is a task where having a banking partner that has both
the necessary experience and expertise can be critical. For
example, it will ideally have qualified ERP specialists deployed
on the ground in individual countries, not just at a regional
level. This ameliorates the risk of ‘lost in translation’ errors
when conveying important technical and financial concepts.
At a more granular level, such a bank may also have already
created a middleware adaptor that can translate across the
required financial systems for a previous client implementation.
Even if it hasn’t, it should have the necessary skills in house
to create such an adaptor. The value of this should not be
underestimated; in some regions (MENA for instance) it is
relatively commonplace for financial systems to be home
grown, so the data format that requires translating may be
proprietary. The manual workarounds that might be required
without a suitable adaptor would be a severe impediment to
effective post-M&A treasury integration.
Conclusion
The NRU sector has historically seen appreciable levels of
M&A activity, but even by those standards current activity
levels in most regions are high . This would be challenging for
corporate treasury at any time, but at present the situation is
further exacerbated by cost-cutting pressures bearing down on
treasury resources. As a result, NRU treasuries are increasingly
looking to their banking partners for assistance in managing
pre- and post-M&A planning and activities.
The difficulty is that few banks can offer the necessary
combination of capabilities. This includes project management
and technological skills, plus a suitable range of cash
and liquidity management solutions, but these alone are
insufficient. A growing NRU M&A trend is geographic
diversification often into unfamiliar territory. Therefore, any
suitable banking partner also needs to be able to deliver a
global physical network to fully support this.
4 Even where entities of similar size are involved, while they may be running the same basic technology - a SAP ERP system for example - they may well not be running the same version.
