Brian Richter is director of global treasury with New York--based IAC, the parent company of 50-some Internet-based businesses, including Ask.com and evite.com. He has been digging into the financial statements of a company that IAC could end up acquiring. For instance, he's been scrutinizing the accounts receivables aging with an eye on any risks present, such as older balances that may be difficult to collect.
Richter also has been analyzing the letters of credit and guarantees that the company has in place, in order to determine the level of exposure. Typically, the counterparties to letters of credit and guarantees require an acquiring firm to replace them at the time a deal goes through, if not before. However, Richter is trying to determine whether IAC would be able to eliminate them, given that it holds more than $1.5 billion in cash. If not, the guarantees would impact IAC's credit limits. Richter also has been tallying the company's payables outstanding and comparing it to receivables to get an idea of free cash flow.
Of course, treasury and finance always have played a role in their firms' M&A strategy. However, before the financial meltdown, the finance folks tended to come into a deal toward the back end of the due diligence process, after negotiations already had started, Richter says.
Now, treasury and finance are making their entrance earlier, as more acquirers are scrutinizing the details before they sign a deal. "We have more say in how it's structured and the valuation it's given," Richter says. Also among their responsibilities: examining target companies' receivables and payables and pension obligations, analyzing the income statement and balance sheet, and evaluating the investments they're holding.
The expanded role of finance and treasury in their companies' deals is likely to become more apparent this year, as M&A volume looks ready to ramp up. The number of mergers and acquisitions in North America rose throughout 2009, from a low of about 600 deals in the first quarter to 830 by the fourth, according to mergermarket's "Global M&A Round-up for Year End 2009." The movement suggests "a return to normality for North American M&A deal activity for 2010," the report notes. In fact, 44 percent of respondents to a 2009 survey of privately held businesses said that their firms were planning to grow through an acquisition within the next 3 years. Accounting firm Grant Thornton conducted the survey.
What's more, many would-be acquirers are loaded. Cash and equivalents among the members of the S&P 500 topped $820 billion as of September 30, 2009, representing 10.7 percent of their overall market value, reports Howard Silverblatt, senior index analyst with Standard & Poor's. In fact, cash as a percent of market value for the S&P 500 exceeded 10 percent throughout 2009, its highest level since at least 1980. Having funds available means that firms can move quickly when the right target comes along, says Frank McGrew, a Nashville-based managing director with investment bank Morgan Joseph. McGrew also represents IMAP, Inc., a global organization of independent merger and acquisition advisory offices.
Another source of motivation, particularly for sellers of private companies, is the potential change in the tax rate on capital gains, says Kerry Dustin, chair of Falls River Group, LLC, an investment bank in Naples, Fla. The rate currently stands at 15 percent. Unless Congress acts, it will rise to 20 percent in 2011. Some business owners may decide to sell in 2010, rather than take their chances on a higher tax bill a year from now.
As more deals get under way, the voice of finance within the M&A process is becoming stronger, says Mike Adhikari, a merger and acquisitions advisor and president and owner of Illinois Corporate Investments, Inc., and Business ValueXpress. While the business development team or chief executive officer may have driven the process in the past, finance is taking on a more prominent role, Adhikari says.
Treasurers' skills in analyzing cash flow, along with profit and loss, are particularly valued today, given the sputtering economy, Richter notes. Treasury often is put to work dissecting the target company's cash comings and goings. "A lot of the risk you run when you buy an asset is based on what's going on with cash flow." Although IAC has been able to fund its acquisitions internally, this is particularly true for companies that need to go to the credit markets in order to fund a deal. "There's a lot less tolerance for not knowing the exact cash flow situation of the asset you're purchasing," he adds.
In fact, Richter's analyses have uncovered red flags in some target companies, such as letters of credit that have increased in size year-over-year. These can indicate that a firm has had trouble meeting all of its payment obligations to its vendors. While none of the red flags has singlehandedly brought down a potential deal, they have signaled larger challenges that needed to be addressed, he says. "If a company is having problems on my end, it's probably across the board."
Several other factors are driving the expanded role of finance and treasury in many firms' M&A processes. The tight credit markets mean that deal structures have become more complicated, says Steve Wold, vice president and treasurer with $4.6 billion Alliant Techsystems Inc., Minneapolis. Several years ago, buyers had an easier time in finding a single source that would finance a deal. Now, it's not uncommon to have to hunt for several sources of capital to bring a transaction to fruition. "Deal structure has always been important, but it's more important now because the credit markets are different," Wold says.
In addition, the capital markets expect more reasonable capital structures and are less interested in funding transactions that depend on inordinately high levels of leverage, says Thomas C. Deas, Jr., executive vice president with the National Association of Corporate Treasurers. "Before the crisis, the capital markets were more forgiving of structures that were at the edge of reality." Again, this shift highlights the need for treasurers to get involved. Deas also is vice president and treasurer with Philadelphia-based FMC Corporation.
Another area in which treasurers' quantitative skills are valued, and which also is likely to grow in importance, is their knowledge of foreign exchange, says Deas. In 2009, more than 500 deals involved U.S. companies acquiring foreign firms, mergermarket reports. While that's down from the go-go years of 2004 through 2008, it's still a sizable number of transactions.
Treasury, along with other areas in finance, has numerous decisions to make in a cross-border transaction, says Dustin. Should it finance in its domestic currency or the local currency? Will it need to borrow in either currency? Does it make sense to hedge the local currency? How should it distribute any profits or losses between countries? How can it minimize taxes, both domestically and for the acquired company?