Transactions Blog

While first indications of economic recovery are appearing, liquidity still stays very high on the agenda of the CFOs and treasurers. As confirmed by PwC’s recent global treasury survey amongst nearly 600 treasurers, there has been a significant jump in the importance of working capital during the crisis and this is expected to last after the crisis. It had been the key trigger to put into practice what we have all known for long. This has lead to several implications for the mergers & acquisitions activity:

Liquidity has a bigger impact on defining deal value

In the current climate, balance sheet items, and more particularly working capital elements are assessed much more carefully by potential acquirers. While working capital levels at deal closing always had been area of concern or even disputes, there is a clear trend to increase scrutiny of the target’s bad debt levels, collectability of receivables and other cash conversion indicators. This also means that treasury and finance are now involved much earlier in the entire deal process, to allow for sufficient time to perform appropriate due diligence on these items, in order to accurately assess deal value.

Focus on implementing working capital changes

Secondly, it has become evident, that working capital levels may change tremendously in a successful acquisition, providing a cash boost instead of a cash drain to the buyer. As such, it has become increasingly common that acquirers are specifically assessing any improvement potential in net working capital. More and more, purchasers are now also seeking to support the financing of the acquisition through a release of excess cash from working capital. Such buyers leverage the momentum of the change of ownership to achieve step changes in the working capital performance.

But it shouldn’t stop with quick fixes. Once new management was able to squeeze initial efficiencies in a post-merger integration phase, it will need to consider the following questions:

• How do we get this into the DNA of the organisation and make it business as usual?
• How do we get from top-of-average to being best-in-class?

At the other end of the table, if there is an opportunity to improve the working capital performance of a firm that is to be sold, we see that vendors are seeking to identify and extract that cash before the divestment.

We do not expect this focus on working capital management to be a short-lived trend. The survey confirms that it is rated as one of the three key areas of focus post-crisis.

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Twelve months after hitting the trough in the worst global recession since the great depression, the world economy is recovering steadily on the back of unprecedented fiscal and monetary policy support by governments and central banks. However, unexpected dark clouds, in the form of the European sovereign debt crisis, falling stock markets and stubborn US unemployment, have gathered on the horizon. At the same time, the potential downside risks to the world economy of poorly timed unwinding of stimulus policies, over-regulation and asset bubbles have not abated.

Are these mere passing showers or ominous signs of a world spinning headlong into the dreaded double-dip recessionary storm?

Download the Asia-Pacific M&A Bulletin: The Asia story (Mid-year 2010).