Companies undergo mergers and acquisitions for various reasons, be it to add new capabilities, access adjacent businesses, or access new markets and products. But at its core, an M&A transaction is largely about realizing economic benefits by capturing synergies – by cost savings, revenue, capital, or all three.
While IT typically has limited impact on the valuation of the deal, early involvement of IT in due diligence is critical for the effective identification of synergies and the effectiveness of subsequent post-merger planning and execution.
The integration approach in the IT function of companies can be classified as:
- Preservation, which leaves the acquired company’s products, processes, and platforms as they are
- Absorption, which brings the entire acquired business onto the platforms and processes of the acquirer
- Best of breed, which adopts the best components of both the businesses.
Four Possible risks
The IT challenges faced during a merger can broadly be divided into four main categories:
1. Systems and process challenges: For preservation integration, the business processes and supporting IT systems remain unchanged but for an absorption integration, the IT systems of the acquired company have to be migrated onto the acquirer’s system. The challenge this creates is the end-user training, which is often overlooked. For best-of-breed type integration, an assessment has to be made to determine the strengths and weaknesses of each company and decide on the component to be selected. The implementation has to be made in a staged manner. This may require temporary application interfaces or a suitable middleware.
Another challenge that companies can face is that the systems that are used by businesses are kept alive even when it makes business and IT sense to decommission them.
2. Data integration challenges: There is a need to develop data interfaces between the systems of the acquirer and the acquired companies to provide a consolidated view of business performance. Along with the integration challenge, there is also a potential risk of a data breach or unauthorized access. For example, data breach disclosures by Yahoo in 2017 resulted in a $350 million reduction in company sale price in an acquisition by Verizon. In the Starwood-Marriott deal, a security breach shortly after the deal was announced led to 5.6% decrease in Marriott’s share price.
3. Asset management challenge: When the acquired company ceases to exist legally post-merger, the transfer of related software licenses, services, maintenance contract is often challenging due to the “change of ownership” contract clauses.
4. Workforce challenge: The most important asset in a company is the workforce, while in preservation-style integration, there aren’t any major structural changes, the impact is high in a best-of-breed or absorption-style integration. Uncertainty about future jobs and roles is high before and after the announcement of merger. There is a risk of decreased productivity and losing high-performing individuals during a merger.
Capturing synergies start with recognizing the importance of including IT activities early on in the M&A process.
One of the key activities that should be undertaken is thorough due diligence prior to closure of the deal.
Once the deal has been signed, the systems and data that need to be integrated, consolidated, or eliminated should be identified. This can be done by identifying experts across both the business and IT to form a data governance group that will research what exists and document what they know.
Consolidation and decommissioning of systems is difficult, particularly deciding which systems to retire and which to keep. Systems that contain data are kept alive, but this approach can be risky both in terms of business and IT. A good alternative would be to adopt data-archiving solutions that allow IT to offload production data onto secondary storage platforms that allow the business and other systems access but still allow operations group to retire those systems safely.
Early and honest communication can mitigate unwarranted fears among employees. As soon as the confidentiality period is over, the deal objectives and company strategy should be shared.
Five Ways CIOs Can Assist M&A
Despite the high involvement of IT in various functions of a business, not enough CIOs are involved at the early stages of a deal. Up to 40% of total synergies are enabled by IT, therefore involving IT from the pre-deal evaluation is necessary to ensure smooth functioning of activities on day one.
1. Grab a seat at the M&A table: The CIO would come with a different set of questions that have the potential to affect the final deal price. Questions could revolve around license, expiration, maintenance fee of enterprise software, etc.
2. Quickly and fairly assessing the resources at hand: The CIO is familiar with the existing set of processes, people, and standards. It is important to find out what is working, what is not, and then use this as a basis for other M&A activities.
3. Prepare systems to be ready from day one: Due to IT’s transversal role in an organization, it is important that the CIO take steps to ensure business continuity right from the start. This can be done by:
- Executing isolation measures plan to guarantee systems security and confidentiality of data
- Retiring the redundant applications
- Reconciling sourcing agreements to get the best of the two companies’ condition.
4. Limit the loss of IT talent: This can be done by identifying talented IT professionals – people with institutional knowledge of how IT at the enterprise works and assuage their fears about their future in the company.
5. Maintaining service levels and performance: Although the companies involved in the merger are under transformation, the customers of the companies expect the same or better performance from the merged entity. CIOs familiar with normal dip in service levels, have to identify, plan for, and communicate to ensure business-as-usual standards.