Can IT Make or Break a Corporate Acquisition?
Best of Both Worlds
Leveraging an M&A transaction requires both parties to put politics aside and make decisions in the best interests of the merged entity. A merger offers a rare opportunity to rationalize the IT portfolio, allowing the companies involved to seize the moment for their competitive advantage.
Might Makes Right
A merger is not a lovefest. The acquiring company inevitably calls the shots, deciding who, what, when, and where. You think the folks who run the acquiring company's IT systems are going to voluntarily phase themselves out of existence? It's not gonna happen.
"Companies that have already established a strategic role for IT in their business are more likely to include IT as an integral partner in their M&A activities and, thus, to improve the probability of success in their M&A initiatives."
-- David N. Rasmussen, Guest Editor
Welcome to this issue of Cutter IT Journal. This month we are examining various perspectives on the challenges IT executives face when their firm seeks to acquire or merge with another company. Both in the due diligence phase and during integration of acquired IT departments, there are distinct procedural steps that can lead to a successful acquisition or a disastrous implementation of the target company's IT operation.
This isn't the first time we've addressed this important topic. Three years ago, Cutter Senior Consultant Mike Sisco (an author in this issue) was Guest Editor for an issue on M&As1 that highlighted the topic as a result of a growing economy. Now the world economy is in decline. But the issues with M&As, as you'll see, are much the same.
In our call for papers on this subject, we began with the heading "Managing IT Acquisitions -- The Good, the Bad, the Ugly!" In this edition of CITJ, our contributing authors have done an excellent job of presenting arguments for and examples of these three scenarios. They describe many of the challenges IT executives face in getting a seat at the M&A table, along with the consequences encountered when IT is not involved in M&A considerations from the beginning. They also offer practical suggestions on procedures and frameworks that, in their collective experience, have helped to achieve successful acquisition results and to improve IT's contribution to business value.
However, don't be misled into thinking that IT's M&A work is a "piece of cake." As Ram Reddy so succinctly points out, "If the IT function is fortunate enough to be invited to the pre-acquisition due diligence party, it is about as popular as chicken pox at a grade school picnic." The challenges IT executives encounter when their company seeks to combine business operations with another firm begin when the CIO learns about a potential acquisition or merger. In the best of cases, the CIO will be involved with the executive team in such deliberations from the very beginning of the process. In the worst case, the CIO finds out late in the due diligence process when he or she receives a phone call asking him or her to be in "Timbuktu" the next day to evaluate the target company's IT operations. As our guest authors tell us, late entry into the due diligence process by the IT executive staff can lead to potentially major surprises downstream in the integration process.
Our authors this month represent a cross-section of international perspectives on the topic of IT due diligence in M&A transactions. The first author, Ram Reddy, is director of enterprise application services for SAIC, an employee-owned research and engineering company in the US. Michael Gentle is a senior information manager in a pharmaceutical company in Switzerland. He has lived through several M&As in Europe and North America, on both the acquirer and the target sides, in the sectors of pharmaceuticals, telcos, consulting, and enterprise software. Steve Andriole is a Cutter Fellow and serves as the Thomas G. Labrecque Professor of Business Technology at Villanova University, where he teaches and directs applied research in business/technology alignment and pervasive computing. Pamela Hollington is a director for Rebound Consulting Ltd. in North Vancouver, British Columbia, Canada. Cutter Senior Consultant Mike Sisco is a former CIO and founder of MDE Enterprises, Inc., an IT manager training company.
We begin this issue of CITJ with Reddy, who positions the discussion with his article about the necessity of IT inclusion in the business considerations for an acquisition. He leads off with the aforementioned quote and then goes on to describe a framework designed to help IT become a much more popular and welcome participant at the pre-acquisition due diligence party. Using a hypothetical example, he leads us through a series of steps focused on strategic alignment, metrics development, and integration planning. Reddy concludes with some guidelines for measuring M&A success. He also provides good cautionary advice regarding the importance of early problem identification and learning from less-than-successful experiences.
Michael Gentle suggests a good mystery novel is about to unfold in his article Dial M for Merger. Instead, he opens with an abrupt statement designed to give us a wake-up call, reporting that a recent study showed "75% of senior management underestimated the critical role of IT in achieving merger success, and only 16% involved IT in due diligence." He proceeds to discuss key factors contributing to this situation and suggests steps the CIO can take to change it. Gentle reviews some of the key business drivers for M&As as he describes three distinct types of mergers and the characteristics of each. He goes on to discuss a number of critical success factors for both due diligence and integration, concluding with a particular suggestion on how IT can enhance its own M&A credentials.
We now come to some pragmatic advice from Steve Andriole, who depicts M&A initiatives as opportunities for undertaking technology reengineering. Since an M&A transaction often involves the integration of separate IT functions into one, he suggests that this is a great time to rationalize the collective technology. Andriole offers a methodology for examining the strategies, leadership, culture, organization, awareness, technology, metrics, and sourcing approaches of both parties, not just the target. He is focused on creating the best "fit" between the parties in order to maximize the benefits of working together.
According to Andriole, these assessments can lead to identifying a set of opportunities for business improvement. But rather than focusing on different considerations for the due diligence and integration phases, he helps us look at the opportunities that may exist for achieving an integrated IT operation that is better than what existed prior to the acquisition.
In our next article, Pamela Hollington takes a slightly different tack. While our other authors address the issue of whether IT "can make or break a corporate acquisition," Hollington argues that IT due diligence should be a major factor in the decision of whether the M&A transaction occurs or not. Hollington makes the point that examining the target company's IT operations can reveal a lot about the rest of the company. Attitudes towards IT security, investment, personnel qualifications, and so on, can provide important insights into the behavioral characteristics of senior management and other target business functions -- discoveries that might well give the acquiring company second thoughts about an M&A. On a more nitty-gritty technical level, Hollington also provides some sage advice on the subject of integrating industry-standard ERP systems with custom, home-grown systems. She goes on to build a strong case for the inclusion of IT in the due diligence phases of an M&A, which should be helpful for all CIOs who anticipate increasing acquisition activity.
Lastly, we come to Mike Sisco's article, True Tales from the Acquisition Trail. He enlightens us with stories about actual experiences from the 45 M&A projects he has worked on over the years. Sisco's six short stories describe the challenges relating to:
1. Software license compliance
2. Disputed software ownership
3. Business closure or elimination
4. Employee responses to an unwelcome M&A announcement
5. The consequences of poor planning and implementation
6. The breadth of IT's influence on other business functions
As with our previous articles, Sisco provides a tutorial on due diligence considerations, highlighting a number of the more subtle aspects of M&A work.
The articles in this edition of CITJ serve as an excellent tutorial for achieving successful M&A initiatives. Our guest authors strike some common themes, with which I concur:
- Companies that are acquiring other firms significantly increase their risk of failure by not involving IT early in the due diligence process.
- Because IT supports the information needs of all business functions, much can be learned about corporate management and other business functions through the conduct of IT due diligence.
- Formal IT business practices (frameworks, tools, work rules, etc.) are absolutely required to achieve successful M&A results.
- More than other functions, IT can identify potentially costly roadblocks to successful integration if engaged early enough.
- Executive management's lack of knowledge and understanding of IT's role in their business can seriously jeopardize the success of new M&A initiatives.
- Gaining a seat for IT at the executive table is a critical success factor for M&A implementation -- yet it remains a challenge for our industry.
Clearly, there is much synergy among the authors in their experiences with IT due diligence in a merger or acquisition. It's interesting to note, however, that only Gentle comments on one particular challenge for the IT function with regard to M&A initiatives -- namely, the impact of layering a major acquisition program on top of IT's normal responsibilities in keeping the business running. The absence of supplementary staff to shoulder some of this dual workload can be a major risk for an M&A. As Hollington points out, "I think that, too often, management figures, `It's all just bits and bytes -- how hard can that be to consolidate?'" Work overload is often a major issue for the IT function, especially when M&A projects are included.
An important point made by Gentle, and implied by the other authors, is that companies that have already established a strategic role for IT in their business are more likely to include IT as an integral partner in their M&A activities and, thus, to improve the probability of success in their M&A initiatives. To provide maximum business value, IT must be involved in a potential merger or acquisition from the outset, when the first discussions about the possible transaction occur at the executive table. In my opinion, however, the burden of inclusion resides not with corporate management, but with the CIO. CIOs who can speak the same business language as their executive colleagues are more likely to receive an invitation to the corporation's executive table. The ability to explain IT value in terms of ROI, EPS, and net income goes a long way in establishing that credibility.
1 Sisco, Mike (ed.). "M&As: Can IT Make the Difference Between Success and Failure?" Cutter IT Journal, Vol. 18, No. 10, October 2005.
ABOUT THE AUTHOR
When companies get the urge to merge, two things have to happen: due diligence on the target company and integration of two distinct organizations. It would seem like a no-brainer to involve the acquiring company's IT organization in both activities -- after all, it's IT that will have to support the operational systems and processes of the newly merged enterprise. Yet IT is frequently shut out of the due diligence process, primarily because of the need for secrecy before a merger is publicly announced. And once the deal is consummated, the acquirer's IT organization is tasked with integrating the two IT departments quickly, usually with little notice or advance planning. Not surprisingly, it's often at this point that the acquiring IT group uncovers daunting integration challenges that should have been identified before the deal went through.
It doesn't have to be this way. In this issue, we'll discuss how IT can add value to an M&A and how CIOs can increase their chances of being invited to the negotiating table. You'll hear about three distinct M&Amp;A types and how they can determine the extent of IT's involvement before the merger and what IT will be asked to do afterwards. A former CIO and veteran of 45 company acquisitions will tell you how to spot potentially costly M&A pitfalls and what to do about them once you do. And you'll learn how savvy IT departments can exploit the opportunity a merger presents to reengineer technology acquisition, deployment, and support. Tune in, before the value of your next M&A goes MIA!