M&A Surge Highlights Zero-Based Budgeting Trend

After months of sluggishness, a recent uptick in M&A activity could mean zero-based budgeting is having its own moment in the spotlight. A form of budgeting that scrutinizes costs across every part of the business, ZBB often comes into its own in the wake of an M&A deal.

We saw M&A activity bounce back strongly in July and August, with a 54 percent increase in the number of deals, with a disclosed value of more than $25 million completed. In the outcome of any acquisition, one of the first things corporations look to do is achieve savings wherever possible to budget for future years. The acquiring firm often naturally looks to reassess its budgeting to seek out any possible efficiency savings. While it has always had a role to play, the drive to cut costs after any M&A transaction is exactly why ZBB should be getting some star treatment from group treasurers and financial directors right now.

ZBB ensures that C-level objectives can be implemented in the budgeting process by tying them to specific functions of the business. This is increasingly important when an acquisition occurs, as costs inevitably need to be regrouped and measured differently to fall in line with new expectations. Trouble is this all involves a realignment of processes and procedures that will be running on different systems, in some cases for a number of years.

Take the example of a successful food and beverage company with commodities trading and procurement. The firm in question, which may be ripe for a takeover, could be in a situation where the trading department is managing the physical contract buying along with the logistics of getting the commodity from points A to B. The trouble is that when it came to risk management and hedging, this becomes challenging without a robust system in place to handle this type of scenario. Indeed, many firms have been running key processes on spreadsheets for the most part with a clear separation between trading and treasury. As a result, they simply haven’t had full transparency and a global view into the position and the real risk around it. The same could be said for any commodity intensive corporation.

This is why there is an increasing trend for firms embroiled in M&A deals to consolidate everything on one platform. From the ability to better enable capture of all their exposures, to supporting their operational and financial accounting needs, having everything in one place leads to improved transparency and better risk management.

If M&A deals continue to rise, it is highly likely that firms considering ZBB may have a little more than just 15 minutes of fame. Those that look to rationalize their systems, while getting visibility into ZBB, will ultimately be the ones to grab the limelight in the treasury and cash management world.

Mark O’Toole is vice president of commodities and treasury solutions for OpenLink.

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