Successful project management

During times of economic uncertainty and political crisis, it becomes increasingly tempting for investors to focus on established market participants and sectors; at the same time, we see an equal level of portfolio streamlining as a common practice among many companies.

This often directly results in a carve-out and thus the operational and legal spin-off of a business unit. This prepares for a potential sale or an IPO and is used in many cases to separate non-core operations from the core business, establishing them on the market as legally independent entities. Notable examples from the DAX illustrate that such spin-offs can prove profitable for both the buy and sell side and can lead to an additional value creation potential being realized.

For such a spin-off process to be mutually beneficial, in many ways it is essential to confront complex requirements and challenges in the organizational and technical framework of the project. Both on the planning and on the management side, it is vital that those responsible have the relevant know-how and profound project experience. This is because, especially in corporate treasury, a carve-out presents management with specific project tasks to be considered and carried out, which, coupled with the level of integration of the company to be split off, are essential factors for success, cost and time frame of a carve-out.

The previous section of findings already succinctly demonstrates the abundance of challenges that the sell side of a carve-out has to face. In the following, this article focuses in-depth on these requirements on the project management of a treasury department and highlights the necessary measures and key issues before, during and after a carve-out.

When it comes to selling a company, every decision must be carefully considered. Before the actual sale process starts, it is essential to have an adequate exit strategy in place, to develop a suitable market approach and to prepare for the closing activities. Having a clear understanding of the strengths and weaknesses of the company to be sold, the Management Board is able to develop a corresponding strategy on how to generate a positive impact on the market among potential buyers. Correspondingly, a variety of scenarios are worked out depending on the type of buyer so as to present the maximum value for the shareholder.

A professional project management is essential to avoid any kind of surprises on “Day One”. It collects, structures and manages tasks, and helps the project team dealing with these activities on an operational level, to keep an overview. Structuring the project into the tree phases “before closing”, “during closing” and “after closing” offers the opportunity to manage the relevant treasury challenges in a time-structure process.

Typical challenges for Treasury are in particular measures in cash and liquidity management, bank account management, credit and investment management and IT landscape. According to the KPMG Powered Enterprise approach, bank account management and cash management has the highest priority to ensure the solvency of the company during the entire process. In a first step, the treasury management must review all open transactions and execute them before the closing to ensure that corresponding accounting entries are completed. Among other things, this includes the closing of open trades, the transfer or closing of hedges, or the distribution of dividends.

By managing bank accounts and signatory powers, as a next step, the company’s solvency is ensured. As part of a carve-out, it is necessary to review and adjust the bank account landscape and IT infrastructure in order to achieve a clear separation between the parent company and the spun-off company. Effecting payments is a central task of the treasury department and should be permanently monitored up to the closing through ongoing project management. For this reason, banks must be contacted in good time before the closing to initiate the necessary changes to the EBICS or SWIFT-contracts. But not only the payment conditions are reviewed, but also the delivery of the account statements to ensure that the main company does not receive any current account data of the sold company after the closing.

In addition, the Know-Your-Customer (KYC) process should not be ignored, which comes into effect in the case of an account opening and, depending on the variety of documents and bank institute, this can take several weeks. At the same time, it must be ensured that the solvency of the company to be sold remains guaranteed at the local level to ensure important payments such as salaries and wages to the employees can be made.

In addition to the external bank relationships, it is necessary to look at the structure of the in-house banking structures or the cash pooling setup. Once all outstanding receivables and payables have been settled, the internal clearing accounts are closed. Internal financing solutions as well as existing credit lines of the in-house bank must be terminated and a follow-up funding for the local company must be found.

Apart from the internal financing, also the external credit and investment management must be revised from the ground up when a company is sold. This means that the local credit facilities of the company to be sold must be terminated, outstanding loans repaid as well as all other outstanding debt obligations addressed. Also guarantee agreements or letters of comfort may also have to be terminated or submitted. Often, exhaustive compilation is required when guarantee contracts are drawn up.

Furthermore, besides the treasury topics it is crucial for the parent company to consider also other areas in the project considerations. As a consequence, the sale of buildings, guarantees or letter of comfort, changes of the balance sheet structure and tax optimization as well as the delimitation of relevant asset positions, for instance, can represent supporting milestones before the closing.

In a digitalized treasury department, it is also important to pay attention to the IT system landscape in addition to the purely operative activities. The Treasury Management System (TMS) as well as the Enterprise Resource Planning System (ERP) and possible other systems, for example payment transactions, trading activities or market data retrieval which are interconnected via interfaces, should be scanned for data from the company to be sold. Master data stored in the systems such as the company, the users of the company to be sold and the corresponding signatory powers, are of primary importance here. After the closing data must be deactivated, to ensure that the users have no access to the central administrative systems of the headquarter. At the same time, it must be ensured, that the parent company will not be able to access current data, such as the account balances of the sold company, after the sale.

Upon closing, it is also essential to implement the legal aspects planned ahead. Numerous contracts and insurance agreements of the sold company must be adapted. Among these are framework agreements for hedging transactions or EMIR agreements. If the sold company has an identification code, a so-called Legal Entity Identifier (LEI), which is mandatory for activities of legal entities on the finance market, headquarters needs to amend the administrative agreement. Framework loan agreements within the organization also must be revised. Furthermore, insurance companies represent an object of consideration. Director and executive liability insurance, employee liability, health insurance, work accident insurance, compensation agreements or intellectual property agreements – these are only a few of the legal issues handled by the legal department in connection with the closing.

In the design of the carve-out project, special emphasis is placed on project specifications, such as for example MTO (money transfer obligation) countries, which must comply with restrictions on payments imposed by the central bank. Should, for instance, one of the companies involved in the deal be located in an MTO country, special solutions are necessary to complete transactions. For special topics that have been planned for but may also arise on an ad-hoc basis, additional time buffers should be factored in during the planning.

Do the company and Management have the necessary setup in place to ensure both operational performance and a smooth and goal-oriented implementing of a carve-out?

In a carve-out process, each project management in the corporate treasury function is confronted with highly complex requirements in many respects. To ensure that the project is nevertheless as successful as possible for both the buy and sell sides, the corresponding focal points for action should be set in stages before, during and after the closing.

This way, the preparation of a carve-out begins with a detailed and coordinated plan as well as with a clearly defined exit strategy. From an operational point of view, cash and liquidity management as well as credit and investment schemas assume priority in the run-up to a carve-out. These are rounded off before and after closing, especially by modifications to the IT system landscape as well as the inclusion of legal aspects.

In the course of a successful project implementation, these operational milestones are accompanied at all times by a large number of other topic blocks that should not be neglected despite the need to set priorities. A dedicated change management should be established at all times, and clear communication and clearly defined responsibilities should be ensured.

Only once the identified project management structure has been achieved and the project has been implemented true to plan can the additional value-creation potential be realized using targeted carve-outs. If this is the case, a carve-out can become an important and targeted instrument in a business strategy and can be established as a value-creating measure on the part of both the investor and the seller.

Source: KPMG Corporate Treasury News, Edition 125, September 2022
Authors:
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Karin Schmidt, Senior Managerin, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG