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24 May 2011

Mergers and IT

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S unil Harji, Director at KPMG, outlines how IT is the glue that will hold a successful merger together.


The nascent economic recovery has set tongues wagging about the prospects of new life returning to the M&A industry. Many forecasters predict an upturn in activity as we move into 2011, driven by a spate of forced divestments and opportunities for market consolidation. Indeed, for many CXOs, one of the biggest challenges over the next year will centre around their ability to derive value from new assets or shore up the sale price of old ones. And right across the C-Suite, executives will need technology-based solutions to solve their integration and divestment challenges.

But CXOs be warned: technology is a double-edged sword in the M&A battle. On the buy-side, technology will be the engine that delivers the promise of post-merger integration and drives much of the perceived value from a transaction. But approached lightly, it can also be the source of massive budget over-runs and productivity-sapping disruptions. On the sell-side, the ability to demonstrate an efficient and effective technology environment can add to the value of a sale; whereas a messy, overly complex or incomplete IT environment can easily reduce the size of the final bid by introducing extra complexity and risk.

In fact, in the boom years M&A has traditionally done more to destroy value than create it; typically through a lethal mix of overpayment and an inability to extract value or deliver synergy benefits in the post-deal environment. And, somewhat justifiably, IT is often vilified as the culprit of this loss of value. But this doesn't have to be the case: Instead, CXOs can - and must - view technology as a key component of any deal-making strategy.

Technology - the glue in the value chain

A significant proportion of all business processes are underpinned by technology. Whether it is interacting with customers and clients, placing orders with suppliers, managing the manufacturing process, supplying business services or administrating a workforce, one would be hard pressed to find many organisations that do not rely - in a large part - on technology to achieve their day-to-day operations. In many cases, technology is often the key enabler of the asset's core operations, fundamentally intertwined with their ability to deliver results.

Merging companies, therefore, need to be able to identify and understand the key processes and supporting technologies that must be protected to help ensure a fluid integration, and maintain long-term value. While CXOs have historically focused on the people and process challenges of integration, technology considerations are increasingly being recognised as a significant and critical element to success.

Which leaves many executives wondering how best to approach the technology aspects of an acquisition or divestment. In light of the pervasive nature of technology, full-scale 'roll-outs' may seem like a somewhat glib approach. Certainly, roll-outs promise less risk during the post-merger process, as organisations take advantage of existing experience and processes to bang their global systems into the new asset. But roll-outs also tend to ignore the underlying value of existing legacy systems, which have been honed to support the slightly different business process, choosing to prioritise global consistency over inherent value.

Increasingly, organisations are opting for a level of integration, where the 'best of breed' of each technology environment is adapted and adopted throughout the business. Even so, purchasers often end up taking more of a roll-out approach in applying their enterprise systems (ERP, CRM, procurement, etc), and then spend multiples of their initial integration budgets trying to interconnect the supporting systems.

Indeed, trying to reconcile legacy systems across merging companies has been compared - quite aptly - to a second marriage, with problem children on both sides. Both families have entrenched systems (some more user-friendly than others but each with strong support) as well as values and methodologies that they cling to as proof of their uniqueness and self-worth. For both the newly-weds and newly-merged, success isn't determined by the signing of a contract, but rather by the flexibility and commitment of both parties.

In some instances, CXOs may opt for a third option altogether and decide to clear the board and redesign a completely new IT environment modelled around the best aspects of the merged business. Particularly in situations where both parties are running ageing systems or in a merger-of-equals transaction, a 'rip it up and start again' approach allows organisations to take advantage of new technology models (such as cloud computing and shared services) to reduce complexity and cost across the business, while refocusing their technology priorities on the areas that create the most value.

The devil is in the detail

Regardless of the post-merger integration strategy, successful M&A almost always boils down to one key element: planning. And while many organisations have become quite adept at structuring and executing deals, few put the proper emphasis on IT as a necessary component to success.

Certainly, due diligence - the process by which any prospective buyer seeks to gain a better understanding of the target business - is a necessary but often painful stage in the M&A process. Here, the need for speed, the desire to win and the fear of disclosing business-critical information come into direct conflict, leaving little time - or appetite - for a thorough analysis and understanding of the underlying (and often complex) technology environment.

This would be a grave mistake. It is critical that executives have a thorough understanding of the role that technology plays in creating value within the target organisation. While it is impossible to separate the real value of an asset from the underlying technology and processes that support it, it is vitally important to understand the role that individual technologies play in value creation.

Curing the post-merger hangover

Equally critical to the success of M&A is the quality and rigour of the post-merger integration planning. Integrating disparate systems can be an expensive and complex business, and fraught with risk. In particular, executives should pay careful attention to the hard costs of integration and factor the impact of these changes into their due diligence and feasibility studies. More than just the 'simple' cost of systems implementation, the integration must also focus on the training requirements, organisational changes and process redesigns that will be necessary to ensure a smooth transition and seamless integration.

I recently worked on a deal involving a manufacturing organisation that, before the credit crisis, had acquired a complementary business in a new geography. Having completed only a cursory review of the existing IT systems, the purchaser misjudged the complexity of the IT integration, and spent almost six times their budget banging their global ERP system into the new division, all the while destroying value for shareholders.

Earlier this year, on finding the market to be unprofitable, the organisation began talks with a private equity buyer who - following a thorough review of the target's IT system - significantly reduced their offer to allow for the right-sizing of the IT for the business. From the private equity perspective, the target's new ERP system represented additional complexity and costs that were not effective when the division was viewed as a stand-alone entity.

Know your buyer's needs

Increasingly, sellers are starting to acknowledge the influence that technology can have on an asset sale, and are taking creative steps to respond and protect shareholder value. One strategy that is growing in popularity is the creation of a two-track approach. This recognises the fact that private equity will often want to view the value of the organisation as a 'stand-alone' business, whereas other corporate suitors will be more concerned about integration scenarios. The underlying technology of the asset, therefore, can be positioned in the way that is most favourable for each type of suitor, rather than a one-size-fits-all approach that may not reflect the true value of the organisation.

Eyes wide open

For executives, the key take-away is that IT must be viewed as a strategic component of any M&A transaction: get it wrong on the buy-side and you may end up overpaying and under-delivering; while getting it wrong on the sell-side will almost certainly reduce the sale price and, ultimately, return for shareholders.

And while no company enters the M&A process consciously wanting to lose, many management teams wind up disadvantaging themselves by failing to realise that technology can be either one of the biggest enablers of value creation, or a significant hindrance.

In the end, successful M&A may come down to the quality of the IT planning and the ability of non-IT executives to understand the real value and implications of technology integration.

Sunil Harji is a Director with KPMG's Performance and Technology practice, where he leads the firm's transaction related services teams. Sunil can be contacted at [email protected] .


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