Understanding the strategic value of IT in MA (2023)

With the number of mergers and acquisitionsMany companies, which are expected to increase in the coming years, are looking for ways to improve their M&A skills, particularly their ability to successfully evaluate and onboard target companies. We've all heard of deals where the stars seemed to be right but the synergies remained elusive. In these cases, the acquirer and target may have complementary strategies and finances, but integrating technology and operations has often proven difficult, usually because they were not adequately addressed during due diligence.

One reason is that IT and operations leaders are often not involved in the due diligence process, preventing them from providing valuable insight into the costs and practical realities of integration. For example, executives cannot anticipate the economics of merged supply chains without a thorough understanding of what is required to integrate the information systems of two companies. This important information is often overlooked. In our post-merger management work, we have found that 50-60% of synergy initiatives are heavily IT-related, yet most IT issues are not fully addressed during due diligence or in the early stages of planning. Post merger (graphic).

See Also

Post-Merger Integration: Guide to the M&A integration process

If haphazard use of technology can derail an acquisition, the reverse is also true: A company with agile, streamlined IT, where leaders streamline systems and make disciplined integration decisions, can use this insight as a powerful tool in selecting the right offerings most attractive. Buyers might even bid higher as they are better prepared to take advantage of the 10 to 15 percent cost savings that come with successful IT integrations.

In recent years we have identified several leading companies whose M&A strategies were supported by a flexible IT architecture. These companies leverage a broader range of synergies faster than competitors who don't address the challenge of IT integration. As a result, these leaders are more successful at evaluating goals and executing acquisition strategies.

In our experience, these companies get at least three things right when it comes to backend integration. First, they get their own IT house in the best possible condition before starting a business. Many have already adopted advanced service-oriented architectures (SOAs), which are generally more flexible and adaptable, and provide a platform that supports a variety of business applications.1These companies also reduced the number of systems (e.g. one ERP system instead of multiple instances) and developed a model that not only takes into account the current company, but also new data that can be gained during acquisitions or start-ups. In short, they have exercised the inner muscles they must have to drive successful integration. CEOs and CFOs must be careful when embarking on an M&A growth strategy that requires a lot of backend integration when their enterprise IT architectures are still fragmented: the risk of failure is too high.

Second, when these companies are in merger talks, senior management ensures that IT executives have a seat at the due diligence table to get their perspective on system integration difficulties. By evaluating the target company's technology, executives can determine how to complement their own IT strategy and operations, including the systems to be maintained and the data that needs to be migrated to the acquiring company's platform. This step is especially important when companies are evaluating cost and revenue synergies. Forecasts are often based on financial formulas or rules of thumb provided by merger advisors. In practice, however, many of these calculations depend on the organization's ability to integrate IT operations, not just IT itself, but the functions that IT enables, including finance, human resources, logistics and customer relationship management.

Finally, these companies carefully plan the post-merger integration, including the role IT will play and the resources available to it. Once the acquirer has transformed its own IT platform, it can quickly integrate the target company's platform into a carefully considered architecture, enabling data migration from the acquired company in less than six months.

To achieve such an aggressive goal, these companies quickly choose the platform and data architecture they want to use and consider other integration details. Addressing these issues removes uncertainty and focuses organizational energy on how the transition will work. Of course, this process is simpler for smaller acquisitions in a familiar industry, but we've seen it successfully applied to larger, more complex deals as well.

Build a robust sourcing platform

Companies that approach mergers and acquisitions strategically build an acquisition-ready information architecture. Think of Oracle, which between 1999 and 2004 consolidated 70 internal systems into a single enterprise resource planning (ERP) system for all business functions, including sales and finance. This approach saved the company $1 billion annually; Above all, a platform was created that supported an ambitious M&A strategy of more than 50 companies between 2005 and 2009. As a result, Oracle can now integrate most acquisitions within six months.

With this ability, the CIO can be a strategic partneridentifyemployment opportunities. The higher the CIO is involved, the more added value can be achieved. As we have already noted, successful mergers and acquisitions increasingly depend on an agile IT architecture that goes beyond facilitating integration and bolstering the value created by the acquisition. IT functions in these companies develop standard processes, tools and data management systems to handle an acquisition more efficiently. Most importantly, this discipline pays off later when IT leaders must make difficult integration decisions, including when to leave legacy systems behind and which to migrate to the acquiring company's system.

In this scenario, executives who demonstrate the value of IT to their C-suite peers in integration efforts can become key players. CIOs who assume this role understand the business goals of an acquisition and the steps required to achieve them. They're not afraid to stick to schedule and budget to achieve synergy, a move that carries some professional risk given the turnover rate of IT executives. And they ensure their IT organizations share this culture so IT can adapt quickly and take critical action up to 100 days after a deal is closed.

At a fast-growing biotech company, business and IT executives work closely during the M&A planning phases to ensure they agree on the strategic goals of a merger. Once a deal is closed, they work together to estimate integration timelines, costs, and risks. A few weeks after the merger, IT leaders update the company and receive final approval of features and plans.

Better communication increases the chances of a successful merger and the CIO. IT leaders who are not involved in broader strategic discussions could miss important information. An insurance CIO outlined a plan for an 18-month IT integration, but could not allocate sufficient resources for a new product line that business leaders planned to introduce in the first year of the combined organization. When the company decided to proceed, the CIO had to deliver the bad news that resources were not available to support the new products without changing the timeline for the rest of the integration.

Be an actor during due diligence

When companies start planning an acquisition, IT needs a seat at the due diligence table. The technology team can identify potential barriers to integration with the acquisition target (e.g. incompatible platforms that require a workaround) or identify potential liabilities (e.g. the vast under-investment in technology that we often see at target companies, resulting in a Leads fusion IT function that relies on legacy architecture and systems).

For example, a waste management company has adopted an aggressive M&A growth strategy that adheres to these practices. Your IT team insists on having full access to the target company's IT, including architecture and systems documentation and interviews with key people. As business progresses, access increases; In some cases, auditors are required to sign confidentiality or non-compete agreements with the target before auditing IT systems.

IT members of the integration team should also assess the target company's internal and external resources, verify that a shared service model exists, and determine how to retain top talent. The acquirer may want to offer cash rewards to retain employees during the integration to avoid a mass exodus that would impact the operational capacity of the new organization. Failure to identify talent gaps can delay integration or force an organization to turn to expensive vendor resources. Both have a negative impact on business synergies.

Once the acquiring company has evaluated the target technology, IT can help identify opportunities and estimate the costs associated with realization. By collaborating with functional sub-teams, IT can understand the true impact of the integration and provide realistic estimates of its duration. For example, at a recent industry merger, IT collaborated cross-functionally during integration planning to develop a key payment system that served multiple businesses. As a result, each line manager could clearly identify not only the processes that would be implemented once the merger was complete, but also the ultimate timing and extent of improvements.

start at full speed

In addition to the due diligence, the actual integration work begins well before the signing of the contract, so that the merged organization is operational from day one. Serial acquirers develop a clear strategy to determine which data to migrate and which systems to retain over time. Financial and employee systems such as payroll and benefits that are critical to business continuity and regulatory compliance are typically migrated to the acquirer's system. The organization can then pursue key acquisition goals.

A resource management company typically begins by integrating logistics and routing systems that are critical to supporting its facility management operations. Executives can then transition to the acquired company's other systems to ensure they are fully integrated within the agreed timeframe (see sidebar, “Key Questions for Day One”).

Day 100 is an important deadline. By then, the organization will have completed its first quarter as a combined entity, a milestone that typically includes coordinated financial and regulatory reporting. To support these efforts, best practice teams agree to make decisions quickly, understanding that the rapid integration of IT systems is more valuable than a lengthy debate about the relative merits of competing systems. Typically, the acquiring company can migrate data and systems to its own platform in less time. This is especially true for horizontal integration, where the markets of the newly acquired company expand into existing markets.

In some cases it makes sense to keep the legacy systems of the target company. For example, a financial institution's CRM systems can be tightly linked to new markets and customer bases, which represent a significant part of the company's value. Trying to integrate these systems with existing systems that target different types of customers can be very disruptive. With some vertical integrations, systems can support different tiers of the value chain, so it may make sense to keep those systems on existing platforms to avoid disruption while IT, operations, and finance develop a long-term, comprehensive integration plan. Successful IT departments embrace the concept of flexibility and use alternative solutions when it makes business sense. For example, at a recent merger of two technology companies, the acquiring company's CIO worked with salespeople to accurately forecast when a billing system would go live. This information enabled management to invest in a critical interim IT solution that offered significant cross-selling opportunities, rather than waiting several months for a new solution.

As companies increasingly rely on information systems to coordinate transactions, manage operations and help capture new market opportunities, the role of technology in mergers is becoming increasingly important. Organizations with a deep understanding of the critical role of IT in mergers and acquisitions can gain an advantage in completing successful mergers. CIOs who articulate this opportunity clearly to their senior peers should be given a more strategic role in mergers and acquisitions.