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Hidden Profits Author:

Lynda J. Roth

As the president and founding partner of Woodland Hills-based LJR Consulting Services, Lynda advises clients on ways to improve profitability and productivity through both technology and business processes. She also works with companies and private equity firms on the role of information technology in mergers and acquisitions.



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M&A - Putting Your IT House in Order

Filed under: IT Strategy, IT in M&A Transaction, Information Technology Strategy, M&A transaction — Lynda Roth at 9:48 pm on Sunday, January 16, 2011

Growing your business by acquisition seems like a fabulous idea but it can be fraught with problems especially when Information Technology is ignored!

In my last post I discussed the article in the McKinsey Quarterly "Understanding the Strategic Value of IT in M&A’.  The article listed 3 key components of IT in an M&A transaction.  The first component is ‘Getting Your IT House in Order’ or as I call it Know Yourself First.  This applies primarily to the acquiring company but it also has application to the selling company.

What happens when executive management prepares a growth strategy based on acquisition, spends the time and resources to find businesses that fit in that strategy, and develop plans to merge the companies only to have those plans not meet expectations because the information technology structure is not sufficient to support the combined company.  I have seen this in far too many clients.  After years of attempting to consolidate, functioning on multiple technology platforms they have failed projects, wasted capital and lack of synergies of the combined companies. 

So what should be done to prevent this outcome and  ’Get Your IT House in Order’?

The areas that should be evaluated and upgraded include  IT  infrastructure, business systems, business processes and IT personnel (within the company and outsourced).  

Infrastructure

Many companies operate on hardware and communication infrastructure that does not have any room for expansion. Many companies, especially those in the mid-market, tend to not invest in IT infrastructure until it is falling apart.  So if the company is barely supporting it’s current systems on the infrastructure, how will it support the instant growth from an acquisition?  This affects simple functions such as email, website and server and network capacity  for additional personnel, in addition to major applications.   So first the infrastructure must be evaluated and upgraded as necessary to support the acquired company or companies.

Business Systems

In this area also, many companies frequently have core systems such as ERP, CRM, industry specific operational applications, that are unable to support additional users or companies.  The situation may be as serious as the core systems cannot support another company or the number of transactions from another company.  One of my clients had acquired several companies over a 5 year period and the ERP system they were using was no longer supported and had been so heavily customized that they could not put the acquired companies on it.  As a result they were using multiple ERP systems and one of their acquisitions was using Excel spreadsheets for manufacturing and inventory control because it had been a corporate spinoff and did not have an ERP system.  In another client who had acquired 4 companies over a 2 year period, now had 5 ERP systems and could not get any consolidated reporting because the ERP systems were different and all operating on their own servers.  This is probably the biggest problem that companies experience after making one or more acquisitions.  By evaluating the capacity for their existing systems and upgrading or selecting and implementing new systems prior to acquisitions, the company will be prepared to add the new acquisition(s).

Business Processes

Inefficient business processes in conjunction with limited use of technology hamper the growth of many mid-market companies.  In many mergers the additional workload from the acquired business can have a significant impact on the performance of employees.  This has an impact on customers and vendors and frequently sales.  As part of the review of core systems, core business processes should also be evaluated.  The goal is to be able to absorb the acquisition with limited if any growth in personnel while maintaining customer service.  As part of the business process review and redesign, implementation of additional technology such as document management systems, bank and vendor integration applications, customer self-service applications, mobile applications can significantly improve productivity.

IT Personnel

This is the final area of evaluation in which the company needs to identify the IT team that will be required to support the combined companies.  Often the consolidated organization and the technology needed to support it, requires different skill sets in IT personnel. 

In summary, when a company decides to grow by acquisition, it is critically important to ensure they have systems and processes to support the new company and ensure the success of the merger.  This is true for strategic acquirers and for financial buyers that are planning an industry roll-up.

In addition to the acquiring organization ensuring their ability to support the new company, executives that are planning to sell their company, especially to a financial buyer, need to get their IT house in order also.  Having antiquated IT infrastructure and systems can greatly impact corporate value and suitors. I have had clients that are unable to complete a sale because their systems are weak and ineffective.  We strongly recommend an IT and business assessment for any company planning either a purchase or sale.

Link to the McKinsey article   https://www.mckinseyquarterly.com/Corporate_Finance/M_A/Understanding_the_strategic_value_of_IT_in_MA_2709

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