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Total Number of Subscribers: 1626 |
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Date: 2nd September 2010 |
Compiled by: M Sathya Kumar |
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Merging treasury units is an interesting challenge given
that the treasury function has broadened over time. A successful post-merger
integration plan will allow companies to enjoy the benefits of the synergies
that come with integrating businesses Despite
the global economic turbulence and financial volatility that has clouded the
turn of the year, merger and acquisition (M&A) activity has prospered.
However, challenges exist for financial institutions’ post-merger integration
(PMI). Merging treasury units is a particularly intriguing case given that
their function has broadened over time. Overcoming these challenges requires
that a strategic plan is laid out early on: moving with speed is critical as
is ensuring that responsibility is clearly allocated to individuals.
Successful PMI plans ultimately allow for companies to enjoy the benefits of
the synergies that come with integrating businesses. M&A Activity on the Up
The
onset of a potential sovereign debt crisis, continued funding difficulties
for European banks and weak macroeconomic data pouring out of China and the
US would lead one to believe appetite for M&As is at a minimum, but the
evidence is to the contrary. Accounting for the strongest opening quarter
since 2008, the value of worldwide M&As totalled US$573.3bn during 1Q10,
an increase of 21% from 1Q09 according to Thomson Reuters. Eighteen percent
of the total value came from the financial services sector alone. Potential
gains from synergies are identified as the most cited justification for engaging
in such activity. But given that M&As are widely accredited for
destroying value rather than creating it, the crux of the battle for
financial institutions lies in how well they execute their PMI programme. Laying the Groundwork
Integrating
the treasury unit presents an intriguing challenge particularly given the
function’s evolution over time. Departing from typical capital management
duties, working with additional complexities of risk and relationship
management makes PMI an exercise fraught with difficulty. Pre-merger
activities are often not given the required level of attention from a
tactical perspective, but its importance in building a solid foundation
cannot be dismissed so lightly. A clear strategic rationale laid out early on
will dictate post merger behaviour. Detailed
objectives have to be identified and prioritised with measurable synergies,
such as potential cost savings from lower operating costs, long before the
transaction closes. These need to have the executive team’s buy-in. Securing
implementation budgets, the resources that will be required and the
timeframes to complete the integration are all pivotal factors. If the
integration time is not judged adequately then an adverse change in market
conditions will severely hamper the benefits motivating the deal. For
example, hedging foreign exchange (FX) and interest rate exposures across the
extended pools of cash and running duplicated nostro accounts longer than
necessary will be costly. Project
teams can be assimilated and mobilised to start carrying out preliminary
studies on the compatibility of existing (acquirer) technology platforms to
handle integration and growth of the combined entity at least in the short
term. Due diligence should go much deeper than assessing the target company’s
cash flow and financial stability. During this phase there will be
limitations, but there should be a comprehensive analysis of target’s entire
business. Other considerations that project teams look at should include
examining how to tackle tougher cash management practices imposed by
regulators in various markets the acquirer may not be located in. Speed and Clear Responsibility
Once
the merger is complete, an appreciation to move with speed is critical. Heads
of desks should be selected from both firms and appointed to start heading up
each of the sub-functional divisions: cash/liquidity, risk and relationship
management. Assigning ownership of data within each section will help reduce
any uncertainty created and provide the leadership needed to make critical
early-stage decisions around revised credit lines, increased market risk on
the balance sheet and new daily controls of settlements and confirmations
that are required. Put succinctly, acting quickly will ensure the new,
combined entity is readily positioned to meet short-term funding and
long-term financing needs. As part of the leadership appointments, retention
strategies will need to be deployed for other key personnel in the acquired
company. The
functionality, scalability and cost of the target company’s core systems will
need to be evaluated, but while this is in motion, the transfer of risk
through individual trades and client data (from the target company) should be
migrated onto the acquirers systems. Client consent will need to be requested
and in doing so the appropriate methodology will have to be adopted.
Bank-issued guarantees and loans can be transferred by way of novation.
Instructing the relevant counterparty can move across bond holdings in the
form of a global note. Where
the counterparty withholds consent, transfer of ownership may have to be
conjectured using alternative structures whereby the acquirer maintains legal
ownership but the economic liability or benefit passes to a third-party.
Intricacies may arise where interest rate swaps are used to hedge loans but
consent is only given by one of the counterparties. Momentum Gathers
In
rapidly appointing the business leaders, the acquirer is maintaining that the
day-to-day management of the business is not jeopardised while the
integration programme runs in parallel. It is at this point that the full
force of change gathers momentum: · Determine the number and types
of IT systems and architectures embedded inside the target company, which
includes identifying systems that can be retired and third-party vendor
contracts that may need to be renegotiated. There will be several enterprise
resource planning (ERP) systems. Focus will be to migrate to a common
business services model requiring only the one application. · Determine the various markets
and jurisdictions in which it operates and the multiple entities
incorporated. It is likely that there will be more than one nostro in each
currency. Accounts will need to be closed to avoid duplication and save costs.
· Understand the structural
composition of the organisation, including any shared services employed.
Centralised cash management units can be strategically placed in low-cost
centres. · Determine potential data
segregation issues and how this will affect the manner in which information
is shared. Staff in one entity may not be able to see client information
booked in another entity. The
short-term focus of the change programme will naturally be on integrating the
front office. Sales and trading platforms, product and service offerings and
the re-alignment of risk and control will top the initial change agenda. In
the medium term, attention will shift towards having a fully consolidated
front-to-back system, eliminating system elements that cannot support
cross-functional processes. A single source of reference data should be in
place, eradicating multiple entries of the same information. Taking Advantage of Synergies
Longer-term
emphasis will be heavy on realising the maximum array of synergies identified
before the transaction took place. Re-engineering processes can create
optimal flows, so that redundant activities are fleshed out and manual
processes can be automated resulting in streamlined operations. Potential
opportunities exist to reduce business line and support costs by way of
headcount reductions and outsourcing opportunities. There is also a
significant degree of potential to yield synergies from working closely with
other functional divisions such as finance who will report on factors such as
interest charges, FX exposures and derivative instruments for planning and
budgeting purposes. There is an overlap waiting to be exploited. M&A Outlook
While
the probability of a renewed recession remains low, some of the deals that could
take place over the next 18 months could prove to be highly lucrative. But
the prospects of completing a successful post merger integration programme
remain challenging to say the least. The globalisation of banking means
activity from a legal, regulatory and financial standpoint will only get more
complex and hence the role of corporate treasuries as a function of asset and
liability management will become all the more pivotal. Article by Derek Taylor is a managing principal at Capco and has over 15 years experience within capital markets. He has predominantly been focused as a project, programme and strategic change manager within risk management, risk IT, and the front and middle offices at global investment banks. Taylor has worked as a managing principal and head of the risk management practices at two management consultancies, Capco and ma partners/Detica, as well as working directly for a number of leading investment banks, including Citi, the Royal Bank of Scotland (RBS) and Investec as a risk management programme manager, a market and credit risk manager and a proprietary interest rate derivatives trader. |
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