Michael Diet (Intensum) : Digital treasury autonomy of division to get financial flexibility and maximize disposal or IPO’s
The idea of digital autonomy of treasury of divisions or part of assets, accompanied by relative functional autonomy could become a new trend to consider. When you want to sell an asset, it's important to make sure you present it in the best light. Beyond the value, i.e., a multiple of EBITDA, the organization, if you cannot integrate it into your own existing industrial organization, is a crucial element. Private Equity Funds buy assets with the hope of selling them for more money later, when they are aggregated or combined with other assets, when the value has been increased, and the classic exit is often the IPO. However, to create value and eventually "exit", you need an adapted and efficient treasury organization. The concept of digital autonomy of finance and treasury, more specifically, will be the future trend for MNC's when preparing asset sales.
Refocus on core businesses
Today, more and more multinational companies are rethinking their organization and strategies. This is why they are selling entire divisions or assets, to acquire others to refocus their activities or to adapt to markets. The trend is strong, especially in the pharmaceutical sector or in sectors under pressure from technological change, or in conglomerates of the Japanese or Korean type (with multitude of different businesses). When an asset is sold, it is more often to a private equity fund (PE) than to another industrial company, mainly for reasons of price, lower appetite, or fear of goodwill impairments. Unfortunately, when we sell, we forget what we are selling, especially in terms of financial organization and treasury. This is why if you sell a division or an entire business, it will be (unless you have prepared and thought it through) without a treasurer, without (internal) financing, without hedging, without guarantees, without cash-pooling, etc. In short, entire divisions are often sold “naked” in terms of treasury features. And so much the worse for the buyer. If it is an industrial group, the asset will be quickly integrated into the existing treasury organization. Conversely, if it is a PE, we will start from scratch with all the risks that this implies. Come what may...
"The best value will come from both levels. Yet the second is often overlooked or forgotten."
Do not only think about the bride’s dowry, but consider also her dress
PE's are known to think that the value to be created will come from EBITDA inflation (certainly not wrong - but not only from revenues) or from the combination of assets. They forget that an exit (i.e., “exit” on resale) of the newly created company often requires an IPO. And yet, an IPO today requires a robust treasury structure and organization that is up to the task. Are we not in a post-WIRECARD world? So, to have an interesting leverage effect, we need to combine several elements, including the bride's dowry and her dress. The dowry is the EBITDA, and the dress is the treasury organization. This key element is often forgotten by PE’s when they buy assets. It is clearly a big mistake. The best value will come from both levels. Yet the second is often overlooked or forgotten.
How achieving this “digital autonomy”?
There are several options to organize a full digital autonomy, which all have pro’s and con’s. We can arrange a Treasury Service Agreement between the HQ and its division, to clone the existing treasury core model, to set-up a tailor-made solution that fits for purpose (more specific) or opt for the implementation of a new TMS. The last one is certainly the most complicate and longest to roll-out. The first one doesn’t allow enough autonomy when and if the division must be separated. We therefore believe that the cloning of the existing treasury core model (even if potentially simplified and with some processes removed) is recommended. This option has the advantage to facilitate change management, limit dissynergies and reduce operational risk. The operating team can still apply group policies and report to HQ while using its own instance and platform until (if decided) the disposal. In any case, the appropriate strategy should be analyzed with a specialist, like INTENSUM.
Selling an asset is not just about posting the price
So smarter and more visionary companies, who would potentially like to sell assets, try to give them first a digital autonomy (i.e., independent ERP and Treasury Management System instances), which is a prerequisite, then an independent or uncoupled treasury team, own financial means, and own financial products to be at any time “splitable” and saleable. The intelligence lies in the preparation. In our opinion, it is a real plus to buy such a financially and treasury-independent division. In addition, an autonomous IT division can be used as a laboratory to test a new tool, a new solution, another application, etc., before a complete and heavy roll-out. IT also requires implementation strategies. So, by preparing the bride, by giving her all the necessary attributes, by making her independent, we facilitate her sale or her listing.
Creating value by splitting a group
As we have seen, some companies also believe that splitting up can create value and that one plus one can do more than two on the stock market. It is then necessary to organize the financial and digital autonomy to allow the split (if and when required). And if you end up not selling the asset thus made independent, you have done nothing wrong because the treasury team will remain united and coordinated. Without saying that we recommend decentralization, it has some merits and can help, if well prepared, to prepare for storms, changes in strategy, or any other unanticipated event. It is, in our opinion, a concept to be considered and yet, few financiers or CFO's consider it. A well-prepared sale will simplify the new owner's life (possibly depending on the buyer) and stop inter-company financial relationships and transactions. Preparing a sale is the best way to make it successful.
François Masquelier, CEO of Simply treasury – Luxembourg June 2023