Business Driven M&A for IT

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Business-driven Mergers and Acquisitions for ITBetter strategies for managing technology integrations

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The integration of two companies into one functional unit inevitably involves great change.

Employees must adapt to culture shifts, and power structures evolve. The IT department is one

of the areas in which these changes are most significantly felt. Mergers and acquisitions can

create new needs and goals and result in numerous projects for which IT doesn’t have the time

or resources. IT requires careful planning and prioritization to avoid integration problems.

Introduction

Mergers and acquisitions can be challenging

Many mergers fail or lead to an inefficient, poorly run IT organization that doesn’t meet the

needs of the business. Combining the people, processes, and technology of two separate

companies is hard. In order to do it successfully, companies must have fully formed

target metrics for integration and have comprehensive plans to meet those goals.

The importance of a business-driven approach

Given the intense pressure and uncertainty present during mergers and acquisitions, it is important

to remember the end goal of IT: driving business goals. By aligning technology integrations with

core business objectives, enumerating priorities, and basing decisions on data, companies can

have more successful integrations and

emerge from the transitions stronger

and better able to face new challenges.

This paper will discuss some of the

major challenges faced by IT during

mergers and acquisitions (M&A), and

present an effective framework to

handle this change more effectively.

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The challenges of M&AWhen companies merge or acquire other companies they must make considerable changes

to integrate and become a functioning whole. Culture, business strategies, and many other

variables must be adapted to fit new environments, people, and goals. This can create

numerous problems, leading to unhappy employees, inefficiency, and abandoned projects.

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Poorly defined goals

Many companies undertake a merger or

acquisition without fully defining the goals of

the process. Without pre-established metrics,

there is no way to know what success looks like

and no way to formulate actionable strategies

to get there. Establishing what the goals of

integration are and what integration model the

merger or acquisition will follow helps establish

priorities and facilitate a smooth transition.

Numerous studies show that the failure rate of mergers and acquisitions ranges from 70% to

90%.1 These numbers should serve as a warning to those who enter into the integration process

lightly. Companies must have effective, tested strategies in place that can reduce risks and lead

to positive outcomes. Thorough planning with insight from M&A experts is critical to success.

The high failure rate of M&A

Mergers and acquisitions fail for many reasons. In some cases the companies were not

a good fit or business leaders could not decide on how best to take advantage of their

combined strengths. In others, IT organizations became too bloated and could not fill their role

efficiently. Too many M&A failures are simply the result of a lack of planning and foresight.

Some of the major reasons M&As fail include:

Why is M&A the source of so much failure?

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Ignoring cultural differences

Every company has a unique identity with unique ways of doing things. When

another company is added to the equation, everything can change. New

superiors, different rules, and shifted values can create culture shock for

employees and lead to resignations, inefficiency, and other problems.

A lack of focus

The CIO has a particularly important role in

ensuring that the transition is a success, but

many CIOs face an overwhelming number of

projects and goals during a merger or acquisition.

This can lead to a lack of focus that in turn leads

to abandoned projects and inefficiency. Clear

leadership with consistent methodology toward

achieving overarching business goals is an

important component of any successful transition.

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A wide range of factors must be accounted for in order to complete a successful merger or acquisition.

Technology is one of the most challenging aspects of integrationIn a recent survey, only half of respondents said that they had a favorable view of how well their

company integrated IT following a merger or acquisition, the lowest of any department except

for research and development.2 The reasons for the particular

difficulty of integrating IT are numerous. Companies often have

implemented technologies in vastly different ways. For

example, one company might focus largely on cloud

and other third-party services to meet their needs, while

another may use primarily in-house technology. Software licenses,

service agreements, equipment, policies, and a wide range of other

factors must all be accounted for in order to complete a successful

merger or acquisition. This involves a number of varied projects that

must be undertaken to consolidate technologies and form a cohesive foundation for the future.

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Understanding integration models

Holding

In this model, the target company is owned by the parent company, but remains a separate entity.

In many ways, this is the simplest of all integration models and will involve minimal transition

efforts on the part of either the parent or target company. It will be necessary to engage in efforts

to assure workers that the merger or acquisition will not result in significant changes for them.

Preservation

The preservation model is similar to the holding model in that the target remains

largely autonomous. However, this scenario does involve a certain amount of

integration and requires greater planning on the part of the IT department.

This model usually only involves integration of back-office technologies. Examples

of this include the parent company adopting the target company’s proprietary

software, or some service contracts being merged to produce greater value.

The target integration model for any given merger or acquisition will dictate the strategies used

to achieve success. Companies must have a solid understanding of how and to what extent they

want to combine resources and efforts. Integration models can run the gamut between holding

models, which essentially keep each individual company completely intact, and absorption, in

which the parent company fully integrates the target company. Deciding on an integration model

will form the basis for how the integration will proceed and help CIOs prioritize their efforts.

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Symbiosis

Symbiosis is an intermediate model between full integration and full autonomy. In this

scenario, companies will integrate wherever there is an advantage to doing so, but nowhere

else. This can be best thought of as a partnership between two separate companies

sharing resources and working closely together toward common goals. Technologies

will likely be merged in many areas, and many processes and policies will be shared,

but there will still be some degree of separation between the target and parent.

Absorption

This model represents full integration between the parent and target companies. It involves

the greatest amount of work to ensure that all elements of the new company that can provide

value are put to use and that all unnecessary

elements are terminated. Often creating

significant turmoil and work for the IT

department, this process must be carefully

managed if it is to be successful. However, it

also provides the opportunity to form a more

robust IT organization that benefits from the

strengths of both companies and potentially reduces

the long-term friction that might occur in other integration models.

Absorption involves the greatest amount of work, but it also provides the opportunity to form a more robust IT organization.

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Determining the right level of IT integration

What are the overarching goals of the merger or acquisition?

Ultimately, any merger or acquisition is undertaken

to drive some larger business goal. IT leaders

must consider these goals when choosing a

target integration model. If the objective was

to acquire people and technology to meet the

core business needs of the parent company,

substantial integration may be necessary. If

the target company is profitable in its own

right and can simply be another source of

revenue, less integration may be necessary.

The first step in any M&A strategy is deciding the right level of IT integration. The

choice will largely determine the course of the acquisition and have great implications

for the success of the IT organization. Leaders must make a structured analysis of

the situation and ask themselves several questions before making a decision.

What value can integration add?

In many cases, technology integration may add significant value through synergy,

lower costs, and improved time to market. It is important to carefully consider every

potential impact of integration and evaluate based on models and data. One of the

most important components of integration is examining areas in which target company

technologies, people, processes, and service contracts can be combined with those

of the parent company to reduce costs, increase efficiency, or drive innovation.

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What are the downsides to integration?

Although there may be many benefits to integration, there can also be many pitfalls

and downsides. Culture clashes, incompatible policies, and overlapping systems can

all create problems and additional work for the IT team. In the case of a full absorption,

there will inevitably be a major increase in the number of projects the IT team must

contend with, likely for a significant period of time. The added costs and potential for

risk that this brings must be considered when weighing the value of integration.

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More successful integration planningOne of the most common sources for failure in M&A is ineffective planning and execution. Many

companies fail to understand or properly prepare for the immense change that the transition will

bring. This inevitably leads to significant problems when the reality of the merger or acquisition

demands action from business leaders. Proper planning is key to achieving the desired outcome.

IT and business leaders should work together

In many companies, IT is not treated as a core department and often does not align its own goals with those of the business.

At the heart of successful M&A planning is a close collaboration between IT and

business leaders. In many companies, IT is not treated as a core department and often

does not align its own goals with those of the business. This is an ineffective model

during normal operations and can be disastrous during times of transition. For effective

integration another company, IT and business leaders must work closely together.

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IT should be involved from the beginningGiven the importance of IT to modern business, and the very real risk that technology

integration can fail, it is absolutely critical that IT leaders be a major contributor to all

M&A decisions. Many business leaders are apt to ignore the real implications of systems

integration and service contracts when the deal is being made, leading to potential problems

in the aftermath. By considering how the merger or acquisition will impact IT from day one,

plans can be made and the deal can be structured in such a way as to avoid issues.

IT must consider business goalsOf course, this collaboration must go both ways. IT should align

its approach to integration with the broader goals of the business.

Every decision should be made considering factors such as how

it will affect the efficiency of employees, the company’s service,

its ability to generate revenue, its effect on the company’s brand,

its risks, and its costs. By examining each element using these

metrics, technology executives can assess what will have a

positive or negative impact on the business as a whole.

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Key considerations for technology integrationSeveral elements should be considered when planning for a technology integration following a

merger or acquisition. This framework will help form the foundations of an integration effort that

builds on the strengths of both companies to drive the business goals of the unified whole.

Synergy

The integration should combine pieces of

each company to form a more complete,

more effective whole. This involves the

maximization of revenue streams through

embedding key products from the target

company into the parent company, or

vice versa. It also involves recognizing

that some elements should be left

segregated in order to achieve maximum

cost effectiveness or efficiency. Elements

that should be considered include people,

operational elements, applications and

services, and enabling technology.

Time to market

As a combined entity, a variety of factors

will change the time to market for

products and services. Leveraging skills

and resources from both companies can

help expedite development, testing, and

production, allowing products to be created

faster and less expensively. In some

cases, this can also work in the opposite

direction, as integration problems can

cause inefficiency and other problems.

Cost

The costs of any integration efforts will be

a major component of developing effective

strategies. Companies must examine the

expenses of a chosen integration roadmap,

as well as the savings it will allow, in order

to make better decisions about what to

keep segregated and what to combine.

Innovation

Bringing together the varied talent and

resources of two companies can lead to a

dramatic increase in innovation. Companies

may have the ability to develop new

products faster, combine technologies to

create more effective solutions, and benefit

from an influx of ideas. However, it is also

important to take steps to make sure that

innovation is not stifled by incompatible

culture changes or processes that aren’t

effective in a new environment.

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Creating an integration planIn order to agree upon an integration model and ensure that the IT

organization is ready to carry out the necessary changes demanded

by that model, careful evaluation and planning is necessary.

Start with a baseline assesmentDesigning an effective plan for technology integration that meets broader business goals

should involve careful assessment of both companies. This assessment should identify any

redundancies in people, systems, infrastructure, applications, vendors, capabilities, and

costs. It should also identify opportunities to add value through integration or collaboration

and look for areas in which there are gaps that need to be addressed. This process should

be broken down into the examination of several distinct components for each company:

People and organization

Assessments must evaluate the skills, capabilities, and overall organizational structure

of both companies. Look for overlaps in employee capabilities, potential power-

structure problems, and any issues that could arise from cultural mismatches.

Processes

Each company has processes in place of particular maturity levels and

other characteristics. Learning how to mesh the way both companies

accomplish goals is a critical step in achieving a successful union.

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Infrastructure and applications

A careful inventory of each company’s applications, systems, and infrastructure must

be made to look for areas of overlap and to allocate resources in the most effective

way. Other issues to address include relative scalability of infrastructure, the suitability

of adopting resources to new tasks, and adherence to industry best practices.

Strategic alignment and governance

During a merger or acquisition, there should be mechanisms in place to ensure

each company is aligned in terms of its goals and accountability. This will help avoid

conflicts of interest and problems in the power structure of the new organization.

Financials

There should be a careful analysis of IT costs by function and activity for

each company. This allows the company to identify items that do not provide

a positive value and to integrate in the most cost effective way.

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Create a timeline and project portfolio After making an assessment and deciding on an integration model, companies

must begin creating a plan that includes a structured timeline with milestones and

metrics to judge progress. This allows IT to prioritize projects according to the needs

of the business and allows for a more organized approach to integration.

Address risk mitigationTechnology integration inherently involves

risk. IT leaders should look at every

decision in terms of the potential costs

and pitfalls compared to its benefits.

This allows for planning that is based

on logical analysis of the facts and

reduces the chances that the integration

will fail due to unforeseen outcomes

Develop a structure for executionPlanning is only half the battle. Companies must also put solid structures in place to

ensure follow through on any projects that have been delegated. This involves ongoing

dedication to the integration process and requires substantial commitment on the part of IT

management to ensure that early work is not undone by later mistakes or lack of will.

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In summaryIntegrating IT after a merger or acquisition is a delicate process that must be handled

with great care. In order to ensure that both companies thrive after the transition, it is

important to understand overarching business goals, what the best integration model

is for the situation, and how to effectively implement the model. This takes thorough

planning, assessment, and strong executive will to ensure a smooth transition.

• Most mergers and acquisitions fail.

• IT integration is challenging.

• Avoiding failure requires a commitment to creating a viable integration plan

and the means to follow through on it.

• IT transition efforts must be aligned with business goals. Business leaders

should involve IT leaders in M&A decisions from the beginning.

• The integration plan is dependent on the integration model. Every company

must carefully choose what to integrate and what to keep separate.

• Each IT organization must be thoroughly assessed prior to integration to

look for opportunities, redundancies, and potential gaps

• Companies must work across organizations and departments to drive

productive change.

Key takeaways:

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References

[1] Harvard Business Review, March 2011. “The Big Idea: The New M&A Playbook”

by Clayton M. Christensen, Richard Alton, Curtis Rising, and Andrew Waldeck.

[2] PwC’s 2014 M&A Integration Survey Report

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Visit us at www.thinkwgroup.com or give us a call at (610) 854-2700 to learn how we can help you.

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Business Driven M&A for IT

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