Corporate Splits & FX: Creating Opportunity out of Change
One of 2014’s most significant corporate trends was the splitting of large public companies. Agilent Technologies, eBay, Hewlett-Packard, Symantec and more have (or will be) broken up into two new firms.
There are, obviously, many factors to consider when a company splits. It is important, however, that issues related to foreign currency risk not be overlooked. Doing so can cause significant downstream issues; conversely, using the split as an opportunity to evaluate FX practices can result in long-term benefits to both new organizations.
When the decision is made to split, the parent company typically enlists third-party firms to reconstruct and divide the past year’s accounting. Unfortunately, it is common for these historical financials to be presented at the very top level, in dollars. In this scenario, future visibility into currency risk and exposures for the affected timeframe is essentially zero.
Additionally, a limitation in human resources typically results in a least one of the new companies being left without adequate insight or expertise on FX and hedging. Even if the new companies run in parallel prior to formally separating, one of the firms usually inherits the lion’s share of institutional knowledge about FX risk and exposures, while personnel at the other are left flailing away at spreadsheets.
The key to addressing these issues is to take a proactive stance on FX hedge program management. This might include adopting technology like CapellaFX (and the associated Reconcile to Zero™ FX gain/loss analytics tool) to mitigate potential effects of institutional knowledge loss and realize unparalleled visibility into exposures and past hedge program performance. With CapellaFX and RTZ™, it is simple to re-create historic derivative information and segment access, providing both companies with the degree of compliance to which they are accustomed – without extreme expense or time investment.
It is also important to use a corporate split as an opportunity to improve practices. For instance, the new companies could re-evaluate their functional currency elections, which could dramatically impact their FX risk profile. (Naturally, such a massive shift must be undertaken as early in the process as possible, largely due to the effect on ERP systems.)
Splitting a public company into two (or more) new firms isn’t easy. However, with a little foresight, planning and agility, it is possible to avoid negative consequences with regard to FX risk – and even come out “ahead” by treating the milestone as a chance to improve on past practices.
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