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NATURAL RESOURCES & UTILITIES

Natural Resources and Utilities(NRU) is currently one of themost dynamic sectors for M&A

globally, with most regions experiencinghigh deal levels. This has knock-onimplications for NRU treasuries that needto be addressed both now and in the longerterm. Lance Kawaguchi, ManagingDirector, Global Sector Head, Global

Banking Corporates, Global Liquidity and Cash Management,HSBC, examines these implications and some potential treasurystrategies to address them.

by Lance Kawaguchi, Managing Director, Global Sector Head, Global Banking Corporates,Global Liquidity and Cash Management, HSBC

Treasury Present andFuture: Natural Resourcesand Utilities M&A

The global M&A environment inwhich NRU treasuries mustoperate is highly active at present.

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Treasury Present

How 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 inM&AApart 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 themesThe global M&A environment in which NRU

treasuries must operate 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 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.

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.

NRU M&A: Regional themesIn 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. Interestingly, 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

The global NRU environment has placed furtherliquidity performance pressure on treasuries as the‘lower for longer’ outlook on oil prices has becomemore widely accepted.

saw three corporate consolidations in the

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 on-

boarding 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 expertiseUnfamiliar 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.

Treasury FutureDigitisationLooking 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 on-boarding with new banking

providers has to be undertaken. Digitisation of

the platforms and processes involved in on-

boarding, could go a long way towards

remedying this. This could simply take the

form of electronic submission of

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NATURAL RESOURCES & UTILITIES

It is not uncommon for periods of M&A activity tobe followed by periods of divestment.

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 on-boarding 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 integrationIn 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 low4. 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.

ConclusionThe NRU sector has historically seen

appreciable levels of M&A activity, but even

by those standards current activity levels in

most regions are high5. 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. �

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Notes1 http://www2.deloitte.com/content/dam/Deloitte/us/Documents/energy-resources/us-energy-and-resources-oil-and-gas-m-n-a-report-2016.pdf2 Gulf News (04/04/2016) http://gulfnews.com/business/sectors/banking/kuwait-uae-lead-gcc-acquisition-deals-in-2016-first-quarter-1.17037043 https://ig.ft.com/sites/special-reports/one-belt-one-road/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. 5 http://www.bloomberg.com/news/articles/2016-04-24/low-crude-prices-to-spur-more-m-a-deals-in-oil-gas-after-slump

NRU treasuries are increasingly looking to theirbanking partners for assistance in managing pre-and post-M&A planning and activities.