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Mergers & Acquisitions: The 26 process steps for a corporate treasurer
| 29-5-2017 | Theo Paardekooper |
One of the topics on the agenda of the treasurer is the merger and or acquisition strategy of the company. This blog gives you a short guidance in the 26 steps in selling (or buying) a company.
26 process steps
The treasurer will join a team of experts to execute this process.
Step 1. Market research. This research will give a clear view on the market to collect sufficient information for the management to make decisions during this process. Mostly a request for information is launched to candidate advisors that will be used in this sales process. These advisors will give a snap shot on the transactions containing information that is used in the Steps 2, 3, 4 and 5.
Step 2. Track record. Investigate the track record of the advisors involved in this process.
Step 3. Valuation of the company compared to its peers. Valuation can be based on Discounted Cash flow, EBITDA-multiples or Net asset Value.
Step 4. Prepare a Long List of possible buyers (or targets). This list can contain strategic buyers (competitors or companies in the same value chain) and financial buyers (private equity and hedge funds).
Step 5. Negotiate a fee structure for the mandate holders of the transaction, the investment banker, legal and tax advisor.
Step 6. Contact program prepared for the parties on the Long List on an anonymized basis. The name of the selling company is not (yet) mentioned in any contact with parties on the Long List.
Step 7. After establishing the first contacts in the markets a Short List will be prepared containing up to 15 possible candidates
Step 8. Preparing a teaser and a non-disclosure agreement. (NDA)
Step 9. An investment memorandum will be submitted to potential buyers after accepting an NDA.
Step 10. A process letter will be distributed containing the time frame and schedule for the next steps in the buying (or sales) process.
Step 11. Non-binding offer launched by the buyer including a data room request. This non binding offer contains at least: – a price and/or pricing mechanism, – information about the buyer and its representatives, – specification of the deal (buying in cash, shares, earn-out, vendor loan etc.) and other requests for information that are required to launch a binding offer
Step 12. The bidder will arrange a bank financing agreement or term sheet.
Step 13. Assessment of the bids by the seller. To a maximum of 5 possible candidates will be assessed.
Step 14. Send an invitation to organize a due diligence. This due diligence will be related to the domains of legal, fiscal, financial, Human Resources, intellectual property, environmental and commercial items. A data room will be available for the potential buyers. Management of the selling company and management of the buying company will give management presentations. Also site visits can be part of this process. The due diligence reports will show the risk, the impact of these risks and the possible actions to mitigate this type of risk.
Step 15. Golden parachutes. Offer to key managers in the target company who probably will not “survive” after the transaction but who will be important in de selection process.
Step 16a. Launch of a binding offer including reservation to final approval by the banks and shareholders of the buyer.
Step 16 b. Presenting term sheet of banks showing the financing capabilities of the buyer to close the deal.
Step 17. Start the approval/advise process to inform formal regulators and the employee’s council of buyer and seller.
Step 18. The seller will send a term sheet/heads of terms to the final preferred bidder (or 2 bidders)
Step 19. The seller gives exclusivity rights to one or two preferred bidders for a period of 3-4 weeks to negotiate a Sale Purchase Agreement (SPA) or an Asset Purchase Agreement (APA).
Step 20. Negotiation of SPA or APA containing:
Price and pricing mechanism about corrections on working capital, debt and cash position and conditions precedent.
Representations (Reps). A declaration of the seller about all the information submitted to the buyer. This information can’t give any reason for discussion or claim after closing.
Warranties, valid for a defined period containing a defined amount to cover certain risks
Step 21. Signing
Step 22. Closing. Transfer of shares from seller to buyer
Step 23. Settlement of share price payment after pre defined calculation of the price as defined in the pricing mechanism.
Step 24. Placing of funds on an escrow account, established to cover the warranties given buy the seller.
Step 25. Closing of accounts that were used for settlement. In the Netherlands a notary public is used in the settlement procedure, but this is not the process in other countries.
Step 26. 18 months after closing. Release of the escrow funds to the seller.
These 26 steps are a framework, but some steps can be merged in one process step. The position of the treasurer in this process is linked to his experience and his position in the management of the company.
Theo Paardekoper
Independent treasury specialist
The changing training requirements of banks
| 26-5-2017 | Michiel van den Broek | treasuryXL |
Some time ago Treasurer Search published an article of our expert Michiel van den Broek. We believe that the topic of changing training requirements is still relevant – for banks and maybe even in a broader context.
Michiel van den Broek writes: Needless to say that the changing processes and services at banks are driven by the rapid information technology developments. This shift also impacted number and composition of bank staff.
Training
During years of training bank staff, I experience a growing demand for financial basic knowledge, for example:
Sufficient financial basic knowledge contributes to better communication and understanding that enhances development & implementation of IT projects. Another important advantage is the lower operational risk: fewer errors, faster identification and problem solving due to better awareness and understanding.
Training online
At the same time I experience lower popularity of traditional training, such as self-study or classroom programs. There is more demand for interactive and easily accessible training via live online classrooms that that can offer next possible advantages:
The improved software and increased internet speed reinforce the trend towards live online classrooms.
The changing training requirements at banks is therefore both content and form. There is more demand for financial basic knowledge through online facilities.
Michiel van den Broek
Owner of Hecht Consult
Risk Management – what does it mean
| 24-5-2017 | Patrick Kunz |
You might visit this site, being a treasury professional with years of experience in the field. However you could also be a student or a businessman wanting to know more details on the subject, or a reader in general, eager to learn something new. The ‘Treasury for non-treasurers’ series is for readers who want to understand what treasury is all about.
Our expert Patrick Kunz tells us more about an important task of a treasurer: Risk Management
Background
One of the main task of a treasury is risk management, more specifically financial risk management. This is still broad as financial risk can result from many origins. Treasury is often involved in the risk management of Foreign currency (FX), interest rates, commodity prices and sometimes also balance sheet/profit loss. Furthermore insurances are often also the task of the treasurer.
Exposure
To be able to know how to reduce a certain risk the treasurer first needs to know about the risk. Often risk positions are taken outside of the treasury department. The treasurer needs to be informed about these risk positions. FX and commodity price exposure is often created in sales or procurement while the interest rate risk is created in the treasury department itself (although this is not always the case). In an ideal world the treasurer would like to know an exposure right after it is created. Often IT solutions or ERP connections with treasury help with that.
Policy
Once the exposure is know the treasurer needs to decide whether it is a risk position or not and whether he wants to mitigate this risk by hedging it. Let me explain this with an FX example: A EUR company who buys goods in USD is at risk for movements in the EUR/USD rate. However, if the company is able to sell these goods at the same time they are bought (a sales organization), for USD then the net exposure could be lower. Risk Exposure is therefore lower as only the profit needs to be hedged.
Risk appetite of the company determines if the treasurer needs to take action on certain risk exposure. Some companies hedge all their FX exposure. The reason for this is often because FX risk is not their core business and therefore not a business risk. Non-core risk needs to be eliminated. Commodity risk is sometimes not hedged as this is the company’s core business or a natural hedge as the companies is also producer/miner and seller of the commodity. Other companies have more risk appetite and hedge only amounts above a certain threshold. Due to internal information restrictions, delays or accounting issues and the fact that some currencies are not hedgable most multinationals always have some FX exposure. In the profit and loss statements you often see profit or losses from FX effect, either realized or non-realized (paper losses).
Hedging
Once you know the risk position the treasurer needs to determine how to reduce the risk of that position. He does that by hedging a position. A hedge is basically taking an opposite position from the risk. Preferably the correlation of these positions is -1 which means that both positions exactly move in opposite directions, thereby reducing the risk (ideally to 0). For FX the treasurer can sell the foreign currency against the home currency on the date the foreign currency is expected, either in spot (immediate settlement) or forward (in the future), removing the FX exposure into a know home currency exposure.
Certain vs uncertain flows
Important about hedging is the way you hedge. A hedge can commit you to something in the future or a hedge can be an optional settlement. This should be matched with the exposure. If the exposure is fully certain then you should use a hedge which is fully certain. If an exposure is only likely to happen (due to uncertainty) then you should use a hedge that is also optional.
Example1: a company has a 1 year contract with a steel company to buy 1000MT of steel every month at the current steel price every month. The goods need to be bought under the contract and cannot be cancelled. This company is at risk for the steel price every month because the steel price changes every day. The treasurer can hedge this with 12 future contracts (1 for every month) locking in the price of the steel for 1000MT. The future contract also needs to be settled every month matching the risk position. 0 risk is the result.
Example2: company X is a EUR company and looking to take over company Y, a USD company. The company needs to be bought for USD 100 mio. Company X has the countervalue of this amount in cash in EUR. The companies are still negotiating on the deal. Currently the EUR/USD is at 1,10. The deal is expected to settle in 6 months. Company X is at risk for a change in the EUR/USD rate. If the deal goes through and the rate in 6 months changes negatively then X needs more EUR to buy USD 100 mio. making the deal more expensive/less attractive. There is a need to hedge this. If this would be hedged with a 6M EURUSD forward deal the FX risk would be eliminated but there is still the risk that the deal is cancelled. Then X has the obligation out of the hedge to buy USD 100 mio. which they have no use for. This is not a good hedge. A better hedge would be to buy an option to buy USD 100 mln against EUR in 6 months. This instrument also locks in the EURUSD exchange but with this instrument the company has the option to NOT use the hedge (if the deal is cancelled) matching it ideally with the underlying deal.
Conclusion
For a treasurer to do effective risk management he needs information from the business to determine the risk exposure. Furthermore he needs to assess the certainty of this exposure; how likely is the exposure to happen. With this information, together with the pre-determined risk appetite (whether or not written down in a policy confirmed by senior management), the treasurer can decide if and how to hedge the position. The certainty of the exposure determines the hedging product that is used.
Hedging products can be complex. Banks can structure all kinds of complex derivatives as hedging products. It is the task of the treasurer to determine the effectiveness of a hedge; a treasurer if often expert in these product and their workings. Hedging could have impact on accounting and sometimes profit/loss consequences but that is beyond the scope of this article.
Patrick Kunz
Treasury, Finance & Risk Consultant/ Owner Pecunia Treasury & Finance BV