Corporate Treasury Power Play: Strategic Moves to Maximize M&A Success

For organizations cementing their approach to financing and managing the financial risk inherent in an M&A transaction, there are important capital markets and financial risk management actions to consider.

With more limited access to traditional financing models, developing alternative financing paths for M&A enables an organization to optimize its capital structure, reduce financial risk, and enhance the company’s overall financial health, fostering a more robust and adaptable financial strategy. In pursuing alternative financing, three key benefits can be pursued:

Build Flexibility and Resilience

Diversifying sources of funding provides greater financial flexibility and resilience. Relying solely on traditional financing options, such as bank loans, may limit an organization's ability to adapt to changing market conditions or seize unique opportunities. By exploring different funding options, you can identify more tailored and cost-effective financing solutions that align with your company's specific needs and risk tolerance.

Chatham Financial’s Amol Dhargalgalkar: Identifying risks early pays dividends.

Alternative financing paths can also mitigate potential challenges, such as regulatory constraints or limitations on traditional borrowing capacity. They can also enhance the company's negotiating power, allowing you to secure more favorable terms and conditions from various lenders or investors. In today’s uncertain market, having a range of financing options provides a crucial buffer against potential capital market disruptions.

Sustainable Funding Solutions

To successfully develop alternative financing paths and achieve a seamless acquisition process, you’ll need to align your organization’s objectives with the most suitable and sustainable funding solutions.

This requires a combination of financial acumen, strategic thinking, and effective communication skills, in order to:

• Navigate a complex financial landscape to ensure the successful funding of the transaction.
• Gain a deep understanding of various financial instruments, market conditions, and risk management strategies.
• Assess the company's current financial position, evaluate potential sources of capital, and explore innovative financing options beyond traditional bank loans.
• Build strong relationships with financial institutions, investors, and stakeholders, which is crucial in negotiating favorable terms and securing the necessary funds.
• Stay abreast of market trends and economic indicators, adjusting the financing strategy accordingly to optimize costs and mitigate risks.

Taking the time to assess internal capabilities early in the process enables you to add partners or internal resources, as necessary, to enter the transaction from a position of knowledge.

Protect Deal Economics

For domestic M&A, the treasury team must protect the deal economics leading up to close against unfavorable interest rate movements. Similarly, in deals where the purchase price is denominated in a foreign currency, you must also manage against FX risk impacting the purchase price.

Fortunately, companies that accurately identify risks within the deal as early as possible and implement an appropriate strategy through close can heavily reduce the impact of adverse FX and interest rate movements.

Long-term and short-term interest rates were particularly volatile in 2023 as the market balanced expected inflation against predicted rate cuts; the 10-year Treasury shifted an average of 31 basis points month-to-month, while three-year swap rates shifted an average of 33 basis points month-to-month. Two protection strategies Chatham regularly explores with our clients are deal-contingent forward hedges and forward-starting swaps, which can be particularly helpful if the acquirer intends to finance the acquisition closer to the anticipated closing date.

Assessing factors like closing certainty, accounting treatment, and cost versus protection level is crucial to determining the right fit. However, for companies concerned about currency appreciation or rate movements impacting the purchase price or the cost of debt, these tools can prove indispensable.

Derivative Strategies

Also evaluate whether your organization can employ derivative strategies advantageously as part of a broader acquisition financing strategy. For example, when acquirers relying on debt for funding a foreign entity acquisition would receive more competitive terms in loans denominated in that entity’s currency, but don’t have access to issue debt in that market, they may use a cross-currency swap strategy to achieve synthetic foreign financing and access more attractive rates.

Organizations can gain additional benefits by structuring an initial exchange of notional, which would further hedge the closing price. Given the highly customizable features of cross-currency swaps, it’s important to evaluate and analyze multiple structural and accounting considerations to determine the best approach. However, this strategy remains popular due to the basis differential between USD and currencies such as JPY, EUR and CHF that has persisted over the past several years, enabling companies to secure less expensive debt.

Finally, as part of any near-term strategy consideration, your treasury team should work to ensure that decisions you execute on will fit into your firm’s overall debt and capital-structure objectives. An independent review of the wide array of debt and hedging structures available to achieve your organization’s objectives can help align your strategy well beyond the close.

Optimize FX Risk Management

When acquiring a company with foreign operations, the extent to which newly introduced FX exposures will impact your organization’s objectives is one of the critical risks to evaluate. However, a global restructure also presents a unique opportunity to re-examine the fundamental assumptions underpinning the company’s holistic FX risk strategy and determine if those will remain valid in the post-close reality.

Questions to consider include:

• How has the company’s FX exposure profile changed because of this acquisition?
• What are the main drivers of FX risk in the new organization, and what will the combined exposure profile look like versus the existing risk footprint?
• Should our company continue to manage FX risk to the same metrics and risk tolerance assumptions given the business model of the combined entity?
• Will adjustments to the tenor, products, currencies, and ratios being hedged need to be made?
• What are the impacts to our hedging and hedge accounting program and regulatory compliance framework?
• How will we measure program success?
• How can we transition from the strategies of the two independent companies to a holistic strategy that is optimal for the new combined entity?

Align Operations

Answers to the baseline questions above might lead to some remapping or a complete revamp of a program, affecting roles, responsibilities, and resource allocation.

While key activities in program management generally require some combination of people and technology, resourcing can pose particular challenges during a merger that leads to global expansion. Determining early on what functions will be centralized or decentralized, and the people, processes, and technology needed to support them, is essential.

Chatham has partnered with companies to leverage an imminent change in resourcing needs as an opportunity to implement stronger risk management processes with improved controls and efficiencies. Corporations can also leverage intelligent risk management tools to streamline and automate many tasks across forecasting, exposure consolidation, hedge accounting, and reporting.

Regardless of the ultimate approach, the critical step of documenting and clearly communicating the updated treasury policies and processes to all stakeholders will ensure smoother adoption, continuity, and cross-functional alignment.

Amol Dhargalkar is a managing partner, chairman, and global head of the Corporates sector at Chatham Financial. A version of this article was previously published on the Chatham website.