There are a few reasons why Australia is a popular target for acquisitions. The country is politically and economically stable, its companies are well-managed and many of them are involved in the mining sector, providing buyers with access to much-sought-after metals and minerals. Another benefit of purchasing an Australian business – though not one that usually makes the headlines – is that, with a free-floating currency, it is easy to sweep cash out of local subsidiaries to be used in other parts of the world. These factors haven’t passed foreign buyers by, and while M&A volumes are certainly off their pre-crisis highs, the pipeline of deals remains robust. More than half of all transactions involve a foreign acquirer buying an Australian asset.
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“CFOs [chief financial officers] might be asked how long they expect the integration to take and whether it will involve expensive exercises such as switching the target over to a new ERP [enterprise resource planning] system,” he said.
Integration projects can be costly and take years to implement. As any CFO who has been through such an exercise can attest, the process of finding out exactly how the target company operates, who their clients are, how they collect cash and make payments, and whether they have the right number of banking relationships can be time-consuming.
The complexity of the integration is largely dictated by how much control and visibility the incoming CFO wants over the new entity – and this can vary widely from company to company depending on whether the acquisition has been made for strategic reasons or to extract synergies. Many of the recent purchases in Australia’s mining sector, for example, have been made by cash-rich Chinese buyers who have been motivated by the desire to secure access to raw materials, rather than a wish to repatriate cash balances.
It isn’t unknown for this type of acquirer to allow the purchased company to operate relatively independently. “Sometimes the local company will have a very simplified treasury structure and the buyer will be happy to let the local finance team manage themselves,” said Dobson. “However, if the firm is a truly global company, that has a history of making a lot of acquisitions, then they are more likely to have a culture of driving down costs by rationalising banking relationships and pooling cash.”
They may also be obliged to maintain a certain level of control under laws such as Sarbanes-Oxley. “If the parent is regulated in the US, then they will require a greater level of control and governance over the cash conversion cycle,” said Dobson at
The advantages of being able to pool cash were brought to the fore during the credit crunch of 2008. At the time, CFOs quickly recognised the value of being able to pull money out of foreign subsidiaries. “During the financial crisis, the desire to access cash balances held here in Australia and extract liquidity to help refinance debt in other markets became an important focus,” said Sam Itzcovitz, head of treasury and trade solutions for Australia and New Zealand at Citi.
Now for the tricky part
The amount of time and money needed to achieve integration will depend on the type of business the target company is involved in. “A company in the retail sector is going to have a far more complex cash management structure that is designed to deal with high volume/low value transactions, and relationships with hundreds of suppliers,” explained Dobson . “An upstream mining company, on the other hand, will be dealing with only a few customers and will have low volume/high value transaction needs.” From an integration perspective, the former is more challenging and will usually involve legacy systems and multiple banking relationships.
It certainly helps if the target company uses the same ERP system. “If both companies are operating the same ERP and all of the subsidiaries are linked into the ERP and there is a common ledger, then the integration process is vastly easier,” said Dobson. Emmanuel Alfieris, who heads Westpac’s trade business in Asia, added: “The banks also have to ensure that payment information is going into the right ledgers.”
The conversion of data, such as customer account numbers and purchase order identifiers, from one system to another can be a real headache for integration project managers. It is possible, for example, for both companies to be using a similar account numbering system. Alfieris said, in these instances, Westpac has employed a “was-is” device whereby an old account number (“was”) is automatically identified in the system as a new number (“is”). “This avoids the costly job of sending out notifications about account changes,” said Alfieris. “From the customer’s perspective, the transition is invisible.” He said Westpac has employed this “was-is” procedure on a number of integration jobs.
One of the more contentious steps in the integration process can be deciding how to treat existing banking relationships. Target companies often have long-standing relationships with cash management banks, and incoming CFOs threaten to disrupt these unions. Australia’s four largest local banks hold quite a grip on the domestic market, and because they offer access to payment systems such as BPay, it is often necessary for acquirers to maintain at least one domestic banking relationship, particularly if they fall into that high volume/low value category as outlined before. (BPay is now the largest internet payment system in the country.) The global cash management banks such as Citi and HSBC argue that it makes sense to have a couple of banking relationships so that both domestic and international bases are covered. “Companies are now very aware of counterparty risk and usually want to work with more than one bank,” said Itzcovitz at Citi, though he clarified this by saying that account consolidation is still an important part of the integration process. “It is still common for companies to streamline their banking relationships after a merger, but instead of having multiple relationships, they stick with a select few.”
The job of integration is always made easier if the CFO has been through the process before,” said Itzcovitz. Many of Citi’s multinational clients are seasoned acquirers. “CFOs who have had past experience with mergers and acquisitions are usually very aware of the benefits that can be extracted if they integrate,” he said. “They are the ones that know an integrated global cash management system helps to mitigate risk.”
This story was first published in the Corporate Treasury Yearbook supplement to the June 2010 issue of FinanceAsia magazine.
