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Fort Worth, Texas
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Credit Challenges of Mergers, Acquisitions, and Buyouts
Suddenly a small customer company becomes part of a large corporation, and the corporation uses its considerable clout to pressure you for extended terms and lower prices. Or maybe the corporation has become highly leveraged during its buying spree and requires more scrutiny and monitoring than the small company did. With mergers, acquisitions, buyouts, and consolidations becoming the norm, you have to be aware of how these changes could impact your company and prepared to take on these challenges. "One of the biggest challenges today is the ever-changing ownerships, structures and sizes of the companies you may be involved with," observes Jeffrey C. Maier, credit manager for Chelsea Building Products Inc. (Oakmont, Pa.). "Mergers, acquisitions, buyouts, consolidations--you need to address these things and keep on top of them.
"What's more, customer bases are more compressed, so you're not just dealing with credit-risk decisions anymore. You're dealing with much broader issues that can have major impacts on your company. Dealing with these issues requires a much different approach to credit than what we got used to 15 to 20 years ago." And central to this approach, notes Maier, is the absolutely crucial importance of staying informed.
"Credit managers who often don't know of a merger, acquisition, or other change until after the fact are automatically at a major disadvantage," he says. To keep informed on what's happening in his industry, he is constantly
- Checking trade papers and other sources of industry information
- Networking with members of credit associations
- Communicating with the sales force.
"Often salespeople are closer to what's happening in the industry because they're on the front lines. They hear when there are prospective buyouts, mergers, and other changes that may have implications on the business you're doing. You can get information from salespeople through conversations or, if that isn't possible, obtain copies of sales reps' customer visit reports and prospect reports to gain insight.
"You must also determine your company's comfort level in doing business with a customer that has become part of another company," he continues. "You can be proactive by investigating the new company even before getting a credit application. Sources of information include trade reports and Internet services such as Edgar, Quicken, and Hoover's.
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"You can come up with press releases and credit information that may be of value in making determinations as to what type of company you're dealing with.
"After the fact may be too late depending on how the deal is structured. You can get hurt if it's a matter of moving inventory or certain limited assets. If you find out ahead of time, you can try to minimize your liability. A bulk sale could leave your customer with insufficient funds to pay you."
Maier's other strategies for contending with the credit risks associated with mergers, acquisitions, and buyouts include:
Requiring new credit applications. You must find out if you're dealing with a creditworthy company as well as one that will be responsible for the bills, including any amount that is currently outstanding.
In addition, a customer with a good credit history with your company may be bought out by a highly leveraged company, in which case, you must decide whether to take on the same credit risk with the new company.
"Suddenly you have a whole new entity," he says. "If it's a viable customer that's now become part of another organization, it's like you're granting credit all over again. Is this company highly leveraged? Are they in good graces with their bank? Are they paying their bills on time? How do their financials look?
"You really have to look at the entire picture once again. For example, if you've provided the customer with a $50,000 credit limit in the past, you may not be willing to have that exposure with a highly leveraged company even though it may have a greater sales presence."
Getting senior management involved. Major changes in how client companies are structured can affect your company in the following ways:
- Profitability, since large companies with clout may want lower prices
- DSO, since large companies may also want extended terms.
The trend toward mergers, acquisitions, and other changes also means your customer base may change and instead of many small customers, you may eventually have fewer but larger customers. This, in turn, means each customer will present greater financial risk to your company.
Because of the impact such changes can have on your entire organization, senior managers should participate in credit decisions. They should be informed of possible changes in customer base and they should be made aware of possible loss of margins and/ or increased exposure. Managers that should be involved include the treasurer or chief financial officer and the vice president of sales.
"Large companies can become the focal point of how you do business," Maier says. "Your considerations have to do with your company's business philosophy and what your company is trying to accomplish.
"In our company, sales and marketing set pricing so it's important for them to know the viability of a customer so they can make intelligent decisions. If a company becomes high risk, you won't want to sell them a low-margin product because typically if risk is high, you want to make sure your profit is commensurate with that. They need to know there will be an impact on future profits.
"Also, decreasing credit limits can be difficult if a customer has a lot of clout. If you have a broad base of customers, losing a customer is not necessarily critical. If you have a smaller customer base, those issues become much more critical. Not only is it a credit consideration but also a marketing and a profit consideration. That's why you need a good understanding of what your company is trying to accomplish. Are they trying to sell every customer or are they selective? That dictates which way you'll go."
Other considerations include:
- Whether you already have specialized inventory for a customer that not other customer can use.
- The economy and the demand for your product.
"If the economy is not as strong as it has been," says Maier, "it places more demand on the credit manager to be on top of collections and to maintain relationships with customers. You need to visit high-profile customers. You need to have relationships with people in these companies so, should they have a hiccup in their business, and you're in a position to react quickly."
Staying on top of collections. High-risk customers should be monitored more closely than others. At Chelsea Building Products, each customer is assigned a credit risk rating based on:
- Percentage of the account that is past due
- Payment beyond terms
- Current ratio
- Sales history and profit history
- Debt to equity
"Lower risk accounts tend to pay on time, have good financial stability, profitability, and the debt-to-equity ratios are all either positive or improving figures. With high-risk accounts, you have to visit on a regular basis, talk to them all the time, and communicate with your salespeople to keep pace with what's happening."
Deciding whether to keep a customer that has fallen behind in payment should be a company decision and, in critical situations, senior management should be involved.
"You have to determine if this is a temporary situation or if it has long-term implications," Maier says. "If it's short-term, by getting together with senior management, you can make a business decision that makes sense to everyone.
"The larger the customer, the greater your vested interest in maintaining that relationship. It becomes a business decision based on Marketing, Finance, Credit, and it also involves Operations if it's a specialized product and you're committed on the basis of inventory you already have in stock.
"You may want to consider different options like personal guarantees, corporate guarantees, or a bank guarantee or restructuring terms. There are a host of ways to try to bring an account into line.
"There's competition everywhere. You might have a specialized product for a specific customer but most likely somebody else can produce something that's almost the same." You may not be able to simply make a black or white decision because of the implications.
Maintaining relationships. Good relationships with salespeople at your own company and with individuals at client companies are extremely important in helping you gain insight as to what is currently happening and what changes may occur in the future.
"Your relationships are where you have the best chance to get inside information so you can make good decisions," he concludes.
Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
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This month's topic: Extended Terms Requests
Click here to participate!
We're examining:
- Whether there has been an increase or decrease in requests for extended terms recently
- Whether or not credit departments have policies relative to extended terms requests
- Whether or not extended terms impact sales commissions
- What the primary factors are when considering extended terms requests
- Who is ultimately responsible for approving extended terms
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