Lessons from successful M&A financing: insights from treasury professionals

Mergers and acquisitions (M&A) present strategic growth opportunities, but their success hinges on effective financial planning and execution. A recent discussion among treasury professionals, highlighted critical lessons on M&A financing transactions. Here are the key takeaways and considerations for treasury teams navigating complex acquisitions.

1. Early involvement of treasury is essential

One of the biggest takeaways from the discussion was the importance of the treasury’s early engagement in the M&A process. While corporate development teams identify targets and negotiate terms, treasury must be kept in the loop to assess financing options, risk exposures, and market conditions.

Considerations:

• Treasury should maintain regular discussions with corporate development teams to anticipate potential transactions.
• Early-stage involvement helps in planning credit facilities, foreign exchange (FX) hedging strategies, and debt market positioning.
• A structured internal alignment process ensures that finance, tax, legal, and investor relations teams are ready to act quickly when deals move forward.

2. Structuring financing for flexibility and cost efficiency

Financing strategy plays a crucial role in executing large transactions efficiently. The group discussed using a mix of bridge financing, term loans, and debt capital market (DCM) issuances to optimize costs and maintain financial flexibility.

Lessons Learned:

• Minimizing underwriting fees: By keeping a single underwriter until the debt capital markets transaction was completed, syndication costs can be reduced.
• Balancing short-term liquidity and long-term debt: A mix of bridge financing and long-term bonds helped structure repayment timelines around expected cash inflows.
• Strategic syndication: Initially working with a single bank helps mitigate information leaks. Later, the syndication process expands to include core banking partners.
• Rating agency considerations: Companies should assess the potential impact of M&A financing on their credit ratings and establish a clear roadmap to restore financial ratios post-acquisition.

Key Takeaway:

A flexible financing structure, designed with cost efficiency in mind, ensures that M&A transactions do not unnecessarily strain a company’s liquidity or credit rating.

3. Managing foreign exchange and interest rate risk

Cross-border acquisitions introduce currency risk, making FX hedging a critical component of M&A financing. The discussion revealed various approaches to managing FX risk, including deal-contingent forwards, FX options, and natural hedging strategies.

Best Practices:

• Choosing the right FX instrument: While FX forwards are cost-effective, they can become risky if a deal falls through. Deal-contingent forwards, though more expensive, eliminate exposure if the transaction does not materialize.
• Balancing cost and certainty: FX options for a major U.S. acquisition, ensuring downside protection despite the premium cost was discussed as an option for large deals where banks were unable to offer deal-contingent forwards.
• Integrating FX strategy with business operations: Some companies leverage existing hedging programs from their trading businesses to offset M&A-related FX risk.

Takeaway:

FX risk management should be tailored to deal specifics, balancing cost and risk exposure while considering alternative hedging mechanisms within the business.

4. Keeping the internal stakeholder group small and experienced

M&A financing involves multiple internal teams—treasury, tax, legal, accounting, investor relations, and financial planning. However, involving too many people early on can slow down decision-making and increase the risk of leaks.

Best Practices:

• Form a core team: A small, experienced group across functions ensures swift decision-making.
• Maintain pre-approved documentation: Having standardized legal documentation for credit facilities expedites execution when deals are imminent.
• Use financial modeling for scenario planning: Companies should assess different financing scenarios, including the impact of credit rating downgrades, to ensure the business can absorb potential changes.

Takeaway:

A well-prepared and tightly coordinated internal team can streamline M&A financing execution while minimizing disruptions.

5. Timing and market conditions matter

Successful M&A financing also depends on market timing. The discussion highlighted that while companies cannot always control when opportunities arise, they can prepare by monitoring market conditions and planning issuance strategies accordingly.

Considerations:

• Market environment impacts financing strategy: Interest rate cycles, liquidity conditions, and investor appetite affect the cost and feasibility of debt issuance.
• Calendar planning: Companies should avoid financing transactions during periods of market volatility, major central bank decisions, or geopolitical uncertainty.
• Seasonal cash flow considerations: Structuring bond repayments around the company’s strongest cash flow period to reduce liquidity risks.

Takeaway:

While M&A opportunities can emerge unexpectedly, treasury teams should maintain a state of readiness, factoring in market conditions and internal financial cycles to optimize financing decisions.

6. Expanding the role of Treasury in non-cash deals

While the discussion primarily focused on cash-settled transactions, there was interest in the growing number of share-based deals in the U.S. Oil and Gas segment. Treasury’s role becomes even more critical in such cases, as equity considerations introduce new financial and hedging complexities.

Key Considerations:

• Valuation impact: Treasury teams should work closely with investment bankers to assess the impact of share-based deals on financial metrics.
• Market perception: Investor relations must manage communication to ensure that shareholders and rating agencies understand the rationale behind share-based transactions.
• Hedging equity risk: Share price volatility needs to be managed, particularly if a transaction is settled partially in stock.

Takeaway:

As share-based transactions become more common, treasury teams must expand their expertise to support equity financing decisions and related risk management strategies.