The Importance of a Treasury Acquisition Strategy

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

A 2018 Deloitte study found that nearly 30 percent of businesses are aggressively seeking acquisitions to extend or diversify their product line, expand their customer base, and/or capture new technology. As financing costs remain relatively low despite recent interest rate hikes, acquisitions are currently a preferred driver of growth for many companies. This deal-making is keeping treasury managers busy identifying, gauging, and minimizing the operational and organizational risks inherent in such transactions.

When one company acquires another, it will likely inherit disparate treasury systems and processes, which will present significant challenges for treasury and financial management staff. Problems can mount quickly as a newly merged team works to integrate all the various areas of treasury operations. To complicate the situation, corporate management often continues the acquisition spree, adding other organizations to the company's portfolio before the previously acquired firm is fully assimilated.

This makes it challenging for the treasury team to capitalize on post-deal synergies that have the potential to improve the function's operations. Such challenges might include addressing how corporate changes affect debt covenants and liquidity requirements, eliminating duplicative activities in collections and payables workflows, standardizing technology systems, and rationalizing a plethora of bank accounts.

Integrating multiple fully functional treasury operations into a single cohesive department can be time-consuming—and even overwhelming at times. However, it's absolutely crucial that companies get this right. Because treasury activities are so important to corporate financial performance, optimizing operations of the treasury function can make the difference between a company being the hunter or the hunted in the M&A field.

A treasury acquisition strategy that is well thought out, well in advance, positions the acquiring organization to increase the efficiency of post-transaction integration, reduce the staff resources and costs consumed by change processes, and maximize potential returns.

Integration Strategy Is Key

Each acquisitive endeavor is different. Sometimes the treasury team have the luxury of time pre-close to learn about the financial operations of the company they are purchasing, but often they do not.

When information is limited pre-close, a group of trusted advisers is invaluable in helping craft an acquisition strategy that is unique to the specific needs of the acquiring organization's treasury function. It's worth spending the time up front to work with accountants, bankers, and attorneys who help facilitate M&A transactions day in and day out. Establishing a framework for a well-defined process that makes it easier to fold ongoing acquisitions into the corporate treasury model can save time and money in the long run.

In theory, the key objectives of integrating two treasury teams—centralizing funds and eliminating inconsistencies in cash management—should improve cash flow and profitability. But wholesale changes bring risk and costs. In developing an acquisition strategy, treasury managers need to evaluate what works within corporate legal structures and focus on those changes that would provide the best return on investment (ROI), while taking all risks into consideration.

Moreover, treasury and finance departments need to maintain their day-to-day operations and cash flows while they plan, and then integrate, in a way that delivers the highest possible ROI to the newly combined firm. Effective execution requires an actionable project plan and close collaboration with internal and external business partners. Here are six key steps finance managers should take to maximize treasury efficiencies post-merger:

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

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

In addition, the mission statement should consider which stakeholders need to buy into changes before they are implemented; what resource constraints integration will encounter (project management, A/P, A/R, IT); the corporate timeline for company integration; and budget goals or metrics that need to be considered. To be effective, the treasury department needs to have the authority to strengthen governance and streamline processes.

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

Does the company prefer decentralization, with offices that collect and disburse on behalf of one division, or a group of facilities within a single region?
Or should financial operations be fully centralized, operating from a single accounting office?

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

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

Finally, consider whether there are cultural differences between the companies that need to be considered when standardizing processes.

3. Estimate liquidity and working capital. After a merger or acquisition—or multiple M&A transactions—treasury needs to assess how much cash the new organization requires to cover disbursements and service debt. The debt used to fund the acquisition may come with new financial covenants, and meeting these commitments may require the combined business to squeeze working capital out of processes. For example, streamlining cash posting may be needed to drive down the new organization's days sales outstanding (DSO). And standardizing the disbursement processes might extend days payables outstanding (DPO) or enable the company to take discounts.

Treasury will need to be prepared to lead the prioritization of such process changes. Knowing the amount of working capital the new company will need to fund operations will help you determine how much excess cash you could unlock by increasing efficiency across the organization. Then you can use this knowledge to plan how to use any excess cash by maximizing the company's interest opportunity or by paying down debt.

4. Document the various treasury components. Define the people, processes, and technology that will be impacted by integration activities. Map out all the systems, payment methods, and workflows with as much detail as needed. Be sure to ask:

What operational models do these different entities use for general ledger and banking?
What customer relationship management (CRM) systems do they employ?
What enterprise resource planning (ERP) systems do they use to manage supply chains?
What are the liquidity workflows, and what are their rationales?

A trusted banking partner may be able to help document workflows for different cash management processes, from the collection channels to payment methods to month-end reconciliation. For example, if the newly combined company will have 20 different payroll accounts sending Automated Clearing House (ACH) files, that is an area to consider consolidating, unless the corporate structure requires that level of complexity.

5. Focus on the largest inconsistencies where change will best drive ROI. Maybe some business units are collecting through lockboxes, some electronically, and some through a website. This situation would require treasury to monitor multiple collection streams, potentially leaving inconsistent reporting in the system and increasing the risk of fraud or unintentional error.

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

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

6. Develop a workflow communications strategy and action plan. Ask yourself:

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

Create a checklist of approvals, messaging, and specific workflow documentation. Develop an action plan that captures the ultimate vision and defines immediate, short-term, and long-term goals. The plan should list improvement targets along with a rollout strategy and communication plan.

Many acquisitions tend to be highly leveraged undertakings, so improving efficiency in treasury management can make a significant difference in long-term asset appreciation and revenue. Tightly managing, aligning, or consolidating various systems and processes allows for more working capital and additional capacity to borrow. That means better valuations by investors and a solid position for future growth.

Christine Tolleson is a Senior Vice President and Senior Director at Capital One Bank. She leads a national team of treasury management consultants dedicated to clients in specialized industries, including healthcare, technology/media/telecommunications, and financial institutions. Prior to joining Capital One in 2017, Tolleson spent 10 years in treasury management focused on large corporate and nonprofit healthcare companies. She is a certified treasury professional (CTP) and holds a Bachelor of Science degree from Northwestern University and an MBA from Wake Forest University.