When Glaxo Wellcome and SmithKline Beecham, two U.K.-based pharmaceutical giants, joined forces in December 2000 to become GlaxoSmithKline (GSK), it was Roger Emerson’s job to stitch the two treasuries together. But that was easier said than done, says the head of tax and treasury at the newly merged £18 billion ($27 billion) company.
The greatest challenge, notes Emerson, was trying to set up common systems. Another important issue, however, was deciding how to structure treasury so that it could provide the most efficient service to all 41 countries in which the firm operates. Before the merger, both companies had centralized treasury activities, though they differed in degree. “SmithKline was more advanced,” says Emerson.
His strategy: “to continue and increase the drive to centralize on a global basis.” Why? Centralization, he says, reduces costs and risks.
Although GSK is run out of the United States, its headquarters are in London, and it is there that Emerson put the new global treasury. All internal and external funding and all foreign-exchange (forex) dealing is run with a staff of about 15, including the regional treasury managers for Europe, Asia, and the international region, which covers the Middle East, Africa, and Australia. “We try to keep the business as simple as possible,” says Emerson. “We don’t hedge the foreign-exchange risk arising from trade flows. And we stick [mostly] to U.S. commercial paper for funding.”
In the United States, a three-person team handles country-specific treasury issues from Philadelphia. Cash management is taken care of by three banks, with a fourth running an overlay concentration account that is managed from London. In Europe, a similar liquidity structure is being set up, using between 8 and 10 local providers, with an overlay bank to concentrate funds.
Asia is more complicated. Although its forex and short-term funding needs are managed in London, local regulations and forex restrictions make it harder to centralize treasury activity there. As a result, cash management is done on a country-by-country basis, with a single bank and local cash pools where possible. In the future, Emerson plans to centralize some of this cash management in Singapore. “But we do not intend to establish a full regional treasury center [RTC] there,” he says.
Like Emerson, treasurers face a thicket of foreign currencies, local banking practices, and complex regulatory and tax regimes when trying to centralize treasury. Managing that complexity globally can be a headache. In the past, many companies with international subsidiaries would simply have kept treasury funds and expertise in-country. Today, however, thanks to such technology as enterprise resource planning systems, better banking software, and the easing of regulations worldwide, the centralization trend is being taken to a higher level–sometimes close to real-time global liquidity.
The optimal composition, however, varies. “There are as many ways to do it as there are companies,” says Susan E. Skerritt, a partner at Treasury Strategies Inc. Consequently, says Tony deCaux, CEO of The Bank Relationship Consultancy Ltd., “the centralization decision is not whether to or not, but rather how much, where, and how, given different local practices.”