Unlocking Cash Opportunities in M&A Transactions
‘Cash is King’ is a mantra in financial management, and this basic financial rule also applies to Mergers and Acquisitions (M&A). When you mention ‘cash’ and ‘M&A,’ most people think about financing the transaction, but there is more to it. There are many opportunities to find cash opportunities in the target company.
After the deal closes, the real work begins to capitalize on the financial synergies and uncover hidden cash opportunities within the acquired entity. This article explores strategies to optimize cash flow and unlock value in target companies after the closing. Hint: You should also look at them at your company, even if you don’t think about M&A.
Unfreeze Blocked Cash in International Transactions
One of the first hurdles in international M&A is dealing with blocked cash due to regulatory, tax, and currency exchange barriers. Success in unfreezing this cash often requires a nuanced understanding of local markets and creative financial strategies. For instance, companies can engage in local financing arrangements, utilize currency hedging to manage exchange rate risk or leverage relationships with local banks to ease the movement of funds. By carefully navigating these challenges, companies can unlock significant cash reserves that were previously inaccessible. I have been in M&A transactions where the seller had just given up, but we could unfreeze it with the help of local experts.
Leverage Asset-Based Lending
Asset-based lending (ABL) allows companies to turn accounts receivable (AR) and inventory into liquid assets. This financing method provides a flexible and immediate cash influx that can be particularly valuable in the integration phase of M&A, supporting operational needs or funding further investments.
I like asset-based lending instruments because they are straightforward. You approach a bank, show them historical and forecasted accounts receivable and inventory values, and use those as collateral. There are some tricky topics when you have international transactions. For example, you may have accounts receivable and inventory in countries where the lender has difficulties accessing them in a case of default. Those countries may be excluded. Insurance of accounts receivable can help in such cases. It may be a lower number (e.g., 85% of the receivable), but it could still be helpful.
While the benefits are clear, it's crucial to weigh the costs, such as accounts receivable and inventory audits, and the requirement to maintain certain levels of collateral. It also means that there are some fluctuations in the available credit line based on the volatility (i.e., increases and decreases) of the receivable and inventory due to the seasonality of the business.
Factoring of Accounts Receivable
We already discussed using accounts receivable as collateral to get a credit line. Factoring is also linked to accounts receivable, but in this case, you sell them at a discount to a third party. This has been another strategic option for improving liquidity for a long time. The approach can be particularly appealing for companies looking to immediately improve cash flow without taking on debt. By selecting reputable partners and negotiating favorable terms, businesses can maintain a healthy cash position to support integration and growth initiatives post-M&A. From my experience, factoring is expensive, but you should check whether it is an opportunity for you.
Sale and Leaseback Transactions
One often underestimated opportunity is a sale and leaseback transaction. If you own an asset you need for operations, you can sell it and lease it back to still use it. It’s a great opportunity to free up capital. The strategy involves selling assets to a financier or another company and then leasing them back for a fixed period. This provides an immediate cash boost and shifts some assets off the balance sheet, potentially improving financial ratios. However, companies must consider the long-term costs and maintain operational flexibility.
The good thing is that we talk about big items like land, buildings, machinery, or bigger CAPEX items. I have been in M&A transactions where sale and leaseback significantly improved the cash situation, and we could invest the cash into growth opportunities.
Term Loans
Post-M&A, the combined entity often has greater assets and revenue projections, making it an ideal candidate for company growth loans. Term loans can provide capital for expansion efforts, product development, or entering new markets. Successful application for these loans hinges on demonstrating the merged company's enhanced value proposition and strategic growth plans. As a rule of thumb, you can usually get 3 - 5 times Adjusted EBITDA as a term loan.
Renegotiate Supplier Prices & Terms
The merged entity's increased size and market power create leverage to renegotiate more favorable supplier terms. Lower purchase prices, extended payment terms, or volume discounts can significantly improve cash flow. Effective negotiation strategies involve thoroughly understanding market rates, building strong supplier relationships, and creating mutually beneficial agreements.
A purchasing project is one of the actions I always propose post-merger. Get the purchasing data from the ERP system, find similar (sometimes even the same) suppliers, group the volume, and run an RFP process for all significant amounts. Based on my experience, you can expect savings between 5-15%, depending on the maturity of the purchasing department in the companies. I use 5% as a rule of thumb when the acquired company has a well-developed purchasing process and 15% when there is virtually no standardized purchasing.
This is one of the actions where many people will tell you that there is no opportunity to improve the purchasing prices and terms, but there is always an opportunity to achieve savings in purchasing.
Sell What You Don’t Need
The target company may have assets or business segments you don’t consider strategically important. What do you do with them? If you're looking for cash opportunities, you may consider selling them. It’s simpler for specific assets and more complicated for business segments or companies. For the latter, I use a portfolio analysis to analyze what makes sense to sell. You can use, for example, the Boston Consulting Group (BCG) matrix, the Product Life Cycle (PLC) analysis, or a simple SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis. Look at this article for more information about portfolio analysis in M&A.
How to Find Cash Opportunities
There are many different ways how to analyze cash opportunities. You can use a checklist or articles like this one. I take the target company's balance sheet during the due diligence and go through it line by line. Think about the topics of this article:
Cash => unfreeze blocked cash
Accounts receivable => factoring or ABL
Inventory => ABL
Non-Current Assets => Sale and leaseback
Accounts Payable => Renegotiation of purchase prices and terms
There are many more items on the balance sheet where you can consider either (1) selling them, (2) using them as collateral, or (3) renegotiating the terms. For each line, brainstorm cash opportunities with your team.
Conclusion
The post-M&A phase is critical for unlocking the true value of an acquisition, which includes cash opportunities. Beyond the immediate synergies, there are numerous strategies companies can employ to optimize cash flow and enhance financial strength. The opportunities are vast, from unfreezing blocked cash in international transactions to leveraging asset-based lending, executing sale and leaseback agreements, securing growth loans, renegotiating supplier terms, and utilizing factoring. By capitalizing on these opportunities, companies can position themselves for sustained growth and profitability in the post-M&A landscape.
