Treasury Considerations in Carve-Outs and Spin-Offs
Separating parts of a business and selling them as new entities is becoming increasingly common as groups refocus on their core activities. Here, François Masquelier, CEO, Simply Treasury, examines the challenges facing both buyer and seller and highlights the specific issues facing treasury professionals.
The demands of private equity investors have begun to revolutionise the M&A business and their specific objectives often include an IPO. In the case of a carve-out or spin-off operation, the business that is being separated will need a fully functional, standalone, and professional treasury organisation immediately after decoupling. This requires assembly of a skilled team, together with new or restructured processes, IT systems, cash pooling, liquidity structure, bank accounts or/and stand-alone financing arrangements. The key issue is timing, as it usually involves setting up the new treasury department to a tight time schedule, sometimes within just a couple of months.
Realigning and refocusing
The significant upsurge of corporate carve-out and spin-off operations is predicted to continue as businesses face increasing competitive pressures and shareholder activism. Is this upsurge a response, a reaction, or a request from the market? Whatever the reason, multinational companies (MNCs) tend to realign their portfolios and refocus on core activities to generate (more) growth, or to create increased market capitalisation by dividing the businesses into separate parts.
The position of treasury
There are many examples of MNCs having launched spin-offs or planning carve-outs. In discussions about such projects, the question of treasury in the new company is seldom adequately addressed, considered, prepared, or organised, but it does need to be contemplated before any disposal to make it successful. If the issue is ignored, the MNCs will face ongoing problems.
The C-suite wants to generate value by these splits and disposals. In some cases, the original business may retain a shareholding in the company/sub-group. Even if it has only a minority interest or are no longer controlling and consolidating the spin-off business, it must ensure its best financial management, including treasury. If you sell one-fifth of your business, you cannot, and certainly will not, transfer one-fifth of your treasury team to the disposed asset, nor will it be easy to transfer freely the IT license’s TMS’ and those of other treasury management tools.
Alternative disposal scenarios
If, when selling an asset, the company doesn’t wish to sell it as is, or with its treasury management accessories, there are various alternatives to consider.
The asset is sold ‘naked’, with no treasurer, no cash management tools, and no intercompany financing or hedging. The buyer will be responsible for treasury organisation in its newly acquired company.
The asset is sold with a pre-organised digital autonomy, an available treasury team is ‘sold’ with the asset. This requires preparation and is expensive.
The asset is sold, but the organisation of the treasury is outsourced on a temporary basis with a Treasury-as-a-Service (TaaS)
solution. This choice can be left to the buyer.
The purchaser is left to implement the complete solution. This is a time-consuming and expensive option, and a treasurer must be hired before anything can be implemented.
Usually, the largest carve-out projects are implemented on a ‘copy-and-paste’ basis, keeping processes, systems, and structures for the disentangled part of the company as close as possible to the previous situation. This enables the ERP environment and cash management structures to be cloned in the stand-alone business, which from a business and IT perspective is normally seen as the only viable route when deadlines are short.
Such an approach means that there will be limited opportunity to pursue optimisation initiatives unless there is a clear compliance reason to do so. It is advisable to design a treasury target operating model for the company sold or made the subject of an IPO. In a copy-and-paste scenario the choices may be limited, but it is still good practice to blueprint and sign off the design of the treasury spin-off, ensuring alignment within treasury and with other stakeholders and finance functions. For this the company needs solid organisation and project management. This includes determining objectives, risk strategy, polices, assessing technology to be implemented, financing and bank relationships, and staffing.
It is obviously also important to align workstreams across functions and to involve all other departments such as tax, legal and IT. Inevitably, the configuration of treasury systems is critical for treasury to be able to perform tests before go-live. From an external stakeholder perspective, it is necessary to involve key banking partners and system vendors as early as possible. There is rarely time to target improvements and implement more optimal solutions. The company needs to focus on practical and effective solutions where it can: the project is already challenging enough, without adding further complications at this point.
The objective is to make sure the carve-out can survive on a standalone basis with its own treasury organisation, even if it is temporary. It is important to consider outsourcing to make sure the spin-off’s future treasury organisation will function efficiently.
It is important to realise that there is no need to have a final configuration aligned to best practices with best-in-class solutions. The carve-out needs an interim, although scalable, function before implementing a more mature treasury organisation.
Treasury autonomy is only one element of the spin-off process, but it is a vital one. It must be aligned and co-ordinated with other separation processes. There are numerous situations in which a clean break is simply not possible. In some cases, more time is needed, or the resources to prepare the treasury and digital autonomy are lacking. Sometimes a seller must plan a transition service agreement with a view to managing the intermediary and transition period.
Each disposal and spin-off are a unique case and must be analysed individually and carefully. In every situation, treasury will be a priority issue.
This article was prepared by François Masquelier in his personal capacity. The opinions expressed are the author’s own and do not necessarily reflect the view of the European Association of Corporate Treasurers (EACT).