Sharing Experiences of Post-M&A Treasury Integration
Many treasurers are involved in mergers and acquisitions (M&A) in some shape or form, and have experienced the challenges of either carving out or integrating treasuries. During this session, moderated by Sebastian di Paola, Senior Partner at PwC, three senior treasury practitioners shared their contrasting M&A experiences.
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Participants Arto Sirvio, Head of Cash & Risk Management, Nokia |
Nokia: A Mixture of Parts
Arto Sirvio, Head of Cash & Risk Management, Nokia
Nokia is a very different company today than when I joined 18 years ago, and even four or five years ago when we were still in the mobile phone business. Since then, the business has been transformed, with three key events taking place in rapid succession. First was the sale of the mobile phone business to Microsoft in 2013. Second, we used the proceeds of the sale to buy Siemens out of a joint venture, so we became a telecom infrastructure and services company. Third, which is still ongoing, is the Alcatel-Lucent acquisition, which firmly establishes the business as a leader in these sectors.
As a result, Nokia today is a mixture of parts of legacy companies, such as Motorola, Panasonic, Alcatel-Lucent, Siemens as well as Nokia, as the companies we acquired had themselves engaged in M&A. When the Alcatel-Lucent deal was announced, and became a company of €30bn of revenue and 104,000 employees globally, only 1,400 of these had been employed by Nokia two or three years earlier. This creates a real melting pot of business cultures and backgrounds, which can be fantastically powerful, but also quite daunting to manage.
Embracing diversity
From a treasury perspective, while Nokia’s treasury function has always been highly centralised, this is not the case for all the companies we acquired. We also had different approaches to treasury policy, such as risk hedging, and the use of structures such as payments on behalf of (POBO): a cornerstone of Nokia’s cash management strategy. Acquiring new businesses also meant expanding the reach of treasury. For example, an important characteristic of Alcatel-Lucent’s treasury was the management of sizeable defined benefit pension schemes, most notably in the United States, so as part of the acquisition, treasury became a substantial pension fund manager.
We needed to consider in detail what we had acquired in order to make the best long-term decisions for the new company, but we also needed to manage our business as usual. Consequently, we issued an interim treasury policy quite quickly that covered issues such as counterparty credit limits, hedging policies etc. whilst devising a more structured longer-term approach.
Integrating our treasury technology environments was also a key area of focus. Fortunately, both Nokia and Alcatel-Lucent used FIS’ Quantum system as their TMS, so this was a straightforward process. There were more challenges when it came to the ERP however, particularly as the ERP environment can typically become quite fragmented after multiple acquisitions. The way we overcame this was to have an in-house system, built and maintained by a treasury IT team of around ten people. This system provides a range of treasury capabilities such as supporting the payment factory. The benefit of this approach is that IT were already accustomed to plugging this system into different ERP systems as it is system-agnostic, which made the integration process far easier.
From diversity to a common identity
One of the outcomes of combining multiple elements of different businesses that had themselves been through M&A was that some of these challenges and experiences were still fresh in the corporate memory. As a result, there was a strong will not to try to replicate one or more legacy companies, but to do things differently and create a distinct corporate identity.
This was particularly important given the extent to which treasury changed throughout this period. At Nokia, we had a global treasury headcount of roughly 45 people before embarking on our M&A journey, and this quickly increased to 80 and ultimately around 180 people. This has to be managed properly, however, and you need a clear view of what the organisation needs to look like, and then recruit accordingly, with a professional recruitment process including applications and interviews, involving HR as well as treasury. The outcome is a fair and transparent process of creating a strong treasury organisation with the right balance of skills and backgrounds.
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Arto Sirvio, Head of Cash & Risk Management, Nokia |
“For me, speed of execution is important. When two companies come together, there is two of everything: two treasuries, two systems, two sets of processes. Pick what appears to be the best in each case and move on. Avoid endless evaluations and beauty parades. Later on, you may consider why you picked a Volkswagen when there was a Mercedes sitting next to it, but at least you started driving and you didn't stop.”
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LafargeHolcim: Preparation, Policy and People
Markus Unternährer, Head of Corporate Finance and Treasury, LafargeHolcim
LafargeHolcim was founded as a result of the merger between the two largest cement producers globally, and as such was a merger of equals. Today, we are the leading global supplier of building materials in cement, aggregates, and ready-mix, with CHF 27bn sales, CHF35 bn market capitalisation and we employ around 90,000 people in 90 countries.
The merger was particularly challenging in terms of timing. Although it was announced in April 2014, it took more than a year to close, mainly for regulatory reasons, and we had to divest CHF7 bn of assets before the merger received approval. This created a long phase of merger preparation and considerable uncertainty for employees. Throughout this phase, we had two treasurers and two integration teams who had to work together – and fortunately they did so very well. Although nobody knew whether they had a job after the merger, it was impressive how constructively people worked together during this period.
However, one of the outcomes of such a long preparation period was that we spent a long time on preparation tasks that were not required in practice. For example, while it appeared to make sense to define policies, processes etc. as a ‘blank sheet’ in advance of the merger, the reality was somewhat different from what we expected. Therefore, the treasury organisation we had defined was not necessarily the ideal one, so we needed to make some modifications.
Compromise and culture
The biggest integration challenge from a treasury perspective was people. We had two treasury organisations, both of which were entirely decentralised, that had to be combined, but with reduced headcount. We now have a more centralised treasury function across three locations; Paris, Zurich, and another centre in Switzerland. This would not be the most obvious structure in an ideal world, but a merger of equals sometimes requires compromise. Having a treasury team located in different places means that communication becomes essential, particularly during the integration which can be very intense. One issue that we did not encounter, although I often hear about it, is cultural differences. As we had operated in the same industry, in businesses that produce and sell locally, this made it easier to integrate. Furthermore, many of the treasury team had international experience, which again made this process more straightforward.
From challenge to opportunity
Across the two businesses, we had around 150 electronic banking systems and 2,700 bank accounts. In some respects, it represented a fantastic opportunity to rationalise and increase efficiency, but at the same time, it was not an easy process to go through given the uncertainties and sensitivities. The other challenge was the balance sheet. This was a merger of a BBB company and a non-investment grade company, and after the merger the balance sheet was stretched. So during the first 12 to 18 months, we had to clean up the balance sheet with significant refinancing activities.
Strategy and policy
Although the two businesses were very similar in terms of industry and treasury organisation, there were some differences we needed to resolve, one of which was hedging strategy. While Holcim did not hedge FX risks in the financial markets, Lafarge had a far more proactive, centralised approach to FX hedging. Therefore, not only did we need to design a new policy for the combined business, we also needed to convince people that this was the right decision. We employed a disciplined change management process, so over 12 months, we implemented a new policy, and we went live with a new hedging approach in January 2017.
Another issue was that the two businesses had different ERPs, so we made the decision early on to transfer the whole business to SAP, which was formerly used at Holcim. This was also an opportunity to review the technology we used in treasury, and invest in better automation, global exposure reporting and bank communication using SAP’s treasury platform.
Lessons learned
Speed is of the essence once an M&A transaction has been announced: ideally, you want to design and implement your target organisation as quickly as possible. This is not always possible in practice, but it is important to limit uncertainty for employees, maintain project momentum, and focus on the key decisions and activities. As we found, a lengthy preparation and integration period can result in a loss of confidence, which can result in retaining people for longer than required, creating too much noise and extending the uncertainty further.
Communication is vital to a successful integration. I spent 30 – 40% of my time talking to the team while we were putting together the new organisation, and it is important to be open and transparent. Don't hide things. Talk to people. Tell them what's going on and give them clarity about their future as quickly as possible.
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Markus Unternährer, Head of Corporate Finance and Treasury, LafargeHolcim |
“Use M&A as an opportunity to do things you would not be able to do otherwise, whether investing in systems, refinancing the balance sheet etc. Act fast and don't compromise on achieving a single location for the treasury team.”
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GE Power: A Catalyst for Excellence
Levente Lázár, Treasurer, GE Power & Water
General Electric Company is a $123bn company by revenue across various industries, including GE Power, Energy Connections, Transportation, Aviation, Oil & Gas, Healthcare, Lighting, Digital and some elements of the Capital business, although this has largely been divested with the exception of elements involved with financing our industrial businesses.
In late 2015, we announced the acquisition of Alstom’s power technology (not transportation) businesses, a ~$13bn acquisition, and the biggest in the history of GE. We were therefore faced with the challenge of how to bring the treasury activities of Alstom into GE.
Replicating capability
Our experience was distinct from Nokia and LafargeHolcim as we were not fully integrating two entire treasury functions. Alstom’s front office remained with Alstom’s transportation business, so we needed to replicate the trade and cash management activities that was previously done by this treasury function. As a result, our primary challenges were execution, operations and systems.
Becoming best in class
An important factor for success is to learn from the business that you acquire, and take the best of each business. For example, we found that the Alstom businesses were quite sophisticated in terms of forecasting and reporting on project cashflows and related balance sheet and movements. For a global business, with a lot of onshore hedging, this can be very complex, but Alstom had a sophisticated system to report on identified cash flows, which has proved very valuable for hedge accounting under IAS. It took time to understand and, to a certain extent, replicate Alstom’s processes and systems, so we couldn’t rush, but it was a very worthwhile investment. At the same time, we found that GE’s hedging strategy was more sophisticated, with better controls, so we could add value to this process.
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Levente Lázár, Treasurer, GE Power & Water |
“Be patient. The acquirer has to understand what it is acquiring – and vice versa. Open communication is very important to reduce the uncertainty that exists on both sides to explain what is happening, when and why. Then act on it. This maintains clarity and momentum, but most important of all is patience.”
