Information Technology in M&A – Understanding the Strategic Value
M&A transactions were in the news this week with the article in the McKinsey Quarterly entitled ‘Understanding the Strategic Value of IT in M&A’. I of course was thrilled to see this article as the authors Hugo Sarrazin and Andy West echoed the key issues I have discussed in earlier posts.
Their opening statement states what I have experienced with several clients, ‘Many mergers don’t live up to expectations, because they stumble on the integration of technology and operations. But a well planned strategy for IT integration can help mergers succeed’. Sarrazin and West stated that in their work with post merger management ,they have found that 50 to 60% of the initiatives intended to capture synergies are strongly related to IT, but most IT issues are not fully addressed during due diligence or the early states of postmerger planning. Simply stated, the more thorough the IT Due Diligence during the evaluation phase the greater the chance to realize expected synergies and cost reductions.
Sarrazin and West highlighted the 3 major tasks that acquiring companies perform that enable them to reap the greatest benefits from the merger. These are:
1. The acquiring firm must get their own IT house in the best possible shape before initiating any deals. I call this ‘Know Yourself First’. The authors provide several suggestions on what should be done to get the IT house in order. What is required to get the acquiring firms IT house in order is dependent on the company, the current status of the IT systems and infrastructure, and the types of acquisitions that are planned. I strongly suggest an complete IT assessment and development of an IT roadmap based on managements strategic plans.
2. As companies begin merger talks, executive management must include IT in the due diligence process to evaluate the target company’s technology, to determine how it complements their own IT strategy and operations. In my opinion this is an absolutely critical step that should be performed by IT professionals experienced in M&A issues. This can be internal IT professionals or an external team that specializes in IT due diligence.
3. Prior to completion of the deal the postmerger integration must be carefully planned, including the systems and processes that will be merged, and the IT resources required.
I will discuss each of these tasks in detail in subsequent posts on this topic.
Per the article, when these tasks are done, the acquirer can rapidly integrate the target company’s platform into a carefully considered architecture, enabling data from the acquired company to be migrated in less than 6 months. I would also add that more importantly it enables synergies such as
- Merger of customers and cross selling of products/services,
- Realization of staff reductions
- Rapid penetration of new markets
- Rapid consolidation of products/services
- Rapid consolidation of vendors and potential favorable pricing due to increased volume
Serrazin and West also stressed the importance of the role of the CIO as a strategic partner in identifying acquisition targets and that the earlier the CIO is involved the more value can be added. This requires the CIO to be not just technology focused but also business focused. They also discuss the importance of evaluating the IT talent in both companies and determining who will be retained and implementing strategies to ensure continuity during the transition, maintenance of crucial talent within the organization. In order for this to be accomplished, IT must be involved early in the merger discussions and due diligence phase.
Their summary states ‘As organizations depend increasingly on the information systems that coordinate transactions, manage operations and aid the pursuit of new market opportunities, the role fo technology in mergers becomes more critical. Companies with a keen understanding of IT’s essential role in M&A can gain an edge in completing successful mergers.’ I concur wholeheartedly. I would also add that it is important for executive management to understand the strategic role of IT in successfully meeting all the business goals including cost reduction, productivity improvements, market share growth, customer satisfaction, revenue growth. In the 21st century, Information Technology is the heart of every successful company.
Here is the link to the McKinsey Quarterly article. www.mckinseyquarterly.com/Corporate_Finance/M_A/Understanding_the_strategic_value_of_IT_in_MA_2709
Here is the link to my previous post about IT Due Diligence
