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Technology white paper: IS Integration during M&As


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  • 1. IT Integration during M&As Technology integration during mergers and acquisitions By: Amit Pawar MBA/MS-MIS Dual degree candidate 2011
  • 2. ContentsExecutive Summary……………………………………………………………………………………………………………………. 2Introduction………………………………………………………………………………………………………………………………… 3 Issue discussed in the press Issue discussed by consultancy firms Academic research on the issue General issue this problem is related toChallenges in resolving the issue…………………………………………………………………………………………………. 6Recommendation……………………………………………………………………………………………………………………….. 7Benefits………………………………………………………………………………………………………………………………………. 11Conclusion…………………………………………………………………………………………………………………………………. 11 1 IT Integration during M&As
  • 3. Executive Summary:Many mergers dont live up to expectations, because they stumble on the integration oftechnology and operations. But a well-planned strategy for IT integration can help mergerssucceed. – McKinsey QuarterlyMergers and acquisitions (M&A) are one way of gaining competitive advantage in themarketplace and achieving in-organic growth. However, they create some of the biggestchallenges for companies and their IT organizations to handle. These challenges incorporateissues that cannot be dealt with conventional leadership and management techniques.M&A is rarely discussed with the IT department, but IT integration plans can either make orbreak the M&A process. The late entry of IT team on the discussion table causes the integrationto be incomplete, delayed, and costly, and this can frustrate business goals and undermine thesuccess of a merger.The consulting firms have conducted extensive research to identify the existence of the issue.According to a 2007 survey, by Bloor Research, Seventy-nine percent of mergers and acquisitionactivity ignores IT integration. In general, most attention is typically given to commercial oroperational issues, which fail to consider IT or system integration challenges.Moreover, this issue is likely to intensify as organizations become more connected anddependent on IT systems for the day to day business. There is an increase in awareness but themanagers are still overlooking the value of synergy that can be derived through a successful ITintegration.There are multiple approaches recommended to address the issue. This can lead to confusionamong managers trying to get a clear direction on the issue.I would recommend thesemanagers to focus on the following key steps to address the problem: 1) Involve IT department during the due diligence phase 2) Engage IT department in development of the integration plan 3) Ensure that IT organization is geared up to manage post-deal IT implementation risks. a. Assessing the current IT environment and making necessary improvements, b. Training staff to handle specific integration efforts c. Creating proper documentation and periodically conducting a capability assessment of existing IT systems d. Developing integration principles and templates for due diligence and planningThis paper discusses the problem in detail along with the recommendation for solving theproblem. 2 IT Integration during M&As
  • 4. Introduction:Why this is an issue?Senior management team typically fails to appreciate the scale and the level of turmoil causedby smashing together two IT-enabled business infrastructures. It results in IT integration beingtreated as a subject that is not of immediate concern. Moreover, the delay in involving the ITteam in the M&A process means that the acquisitions are executed under severe stress so thepost-merger IT integration becomes a process that is force fitted after the merger occurs.The second reason management fails to fully embrace IT integration is that it usually requiressignificant investment – potentially hundreds of millions of dollars – in areas such asrationalizing applications portfolios, migrating customers and products, and building newcapabilities that combine the best of both companies.Fingers increasingly point to IT integration as one of the key sources of problematic M&A’s,especially in industries which are largely driven by technology: the difficulties that surround theintegration of complex, sprawling, and incompatible IT infrastructures.Issue discussed in the trade press:  M&A deals still overlooking IT integration challenge - Research finds no integration within three months of deal completion. –  In general, most attention is typically given to commercial or operational issues, which fail to consider IT or system integration challenges. M&A is rarely discussed with the IT department, but IT integration plans can either make or break the M&A process. -  Determine how the CIO use potentially high integration costs to help negotiate the purchase price down.... thats a sure winner with shareholders looking for added value. The City tends to give a merged company only 100 days to deliver tangible benefits, so the CIO can really improve his stock and influence by ensuring data integration costs are factored in accurately and by talking to the shareholders wallet," - Gordon Lovell- Read, CIO of Siemens.Issue highlighted by consultancy firms:  "The truth about M&As is that about half of them either fail outright or else fall well short of the value theyre expected to bring because when viewed unilaterally, IT integration can wind up crippling rather than enabling the new organization," says Gary Curtis, partner in Accentures Strategy practice.  Many mergers dont 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. – McKinsey Quarterly  Seventy-nine percent of mergers and acquisition activity ignores IT integration, according to a 2007 survey, this time by Bloor Research. 3 IT Integration during M&As
  • 5.  Accenture studied 57 M&A projects in North America and Europe in the late 1990s (target companies: $100 million to $500 million in revenues) and monitored them post- merger, paying attention to the integration efforts surrounding IT operations and the effects on the company. The study found 58% of the companies did not get IT involved in integration planning until after the plan to merge was announced. Twenty-six percent got involved during the deal, and only 16% got involved pre-deal.Research that identifies the issue:  Seventy-five percent of managers worldwide admit they dont even consider how IT issues will affect operations until after the merger, according to a 2007 Hay Group study  According to the Bloor study of 56 large organizations, only 21% of CIOs feel that the consideration of IT issues had been given appropriate weight in the decision to merge or acquire.Examples that illustrate importance of IT Integration in M&A:  Lloyds and TSB were unable to integrate their back-office systems resulting in bank tellers unable to access a common set of banking services. The expected synergies were not realized.  On the other hand, the success story of Sallie Mae’s acquisition of USA Group was the result of a successful post-merger IT integration.  The merger between Hewlett-Packard Company (HP) and Compaq Computer Corporation (Compaq) failed as the synergies identified prior to the merger did not materialize. One of the reasons was the complexity involved in moving four ERP systems to a new SAP system. Ultimately, the integration problems cost HP’s new enterprise server division $400 million in revenue and $275 million in profits. 4 IT Integration during M&As
  • 6. General issue this problem is related to:Failure of M&A’s to create value for shareholdersThe primary causes of this general issue are given below, • Flawed corporate strategy for either or both companies • One company sugarcoats the truth, the other buys a PowerPoint pitch • Sub-optimum integration strategy for the situation • Cultural misfit, loss of key employees after retention agreements are up • Acquiring companys management team inexperienced at M&A • Flawed assumptions in synergies calculation • Ineffective corporate governance, plain and simple • Two desperate companies merge to form one big desperate company • CEO of one or both companies sells board and shareholders a bill of goods • An impulse buy or panic sell gets shoved down the boards throatStudies that identify severity of the general issue: • Numerous studies digging into transactions that have totaled between $1 and $4 trillion annually during the past decade - from deep academic research to qualitative surveys by well-connected consultancies - have come up with roughly the same figure: around 70% of M&As ultimately fail to create any incremental shareholder value. • Mercer Management Consulting noted that between 1984 and 1994, 60% of the firms in the "Business Week 500" that had made a major acquisition were less profitable than their industry. • In 2004, McKinsey calculated that only 23% of acquisitions have a positive return on investment. 5 IT Integration during M&As
  • 7. Challenges in resolving the issue:As we make an effort to understand the challenges faced in resolving the issues, we need toknow some key facts about technology integration   Each organization uses its own technology and has crafted its own infrastructure, with distinct operating costs.  Bringing the two systems together means additive costs, and integrating those means that complexity increases exponentially.Key challenges: If the potential issues are identified before the M&A process the ITorganization will be better geared up to manage post-deal IT implementation risks.  Identifying and resolving IT conflicts between organizations.  Assessing, analyzing and planning the integration of two different IT infrastructures without any operational loss or efficiency.  Improving operational efficiency by identifying the synergies to reduce the total cost of operations.  Identifying all the touch points of information flow and the data source required for integration.  Maintaining the corporate security policies to protect the data and comply with all regulations.  Bringing the IT and business side together to develop a common vision of the combined company end state and to create a common agenda for getting to it. 6 IT Integration during M&As
  • 8. Recommendations:Successful M&A integration does not rely exclusively on the CIO and IT, but they bear a largepart of the burden, since integrating people, operations, information and processes requiressignificant technology investments.One of the critical recommendations is that the management should ensure early involvementof IT team in the M&A process Proposed Current involvement of IT involvement of IT team teamSource: Adopted from chart by SPS intellectFollowing steps can be taken by the managementto preparethe IT team for any futureintegration opportunity:  Assessing the current IT environment and making necessary improvements  Training staff to handle specific integration efforts  Creating proper documentation and periodically conducting a capability assessment of existing IT systems  Developing integration principles and templates for due diligence and planningQuite clearly, a successful post-merger integration must include a robust IT integration planwhich forms an integral part of all the phases in M&A process. The best plans begin withrigorous IT integration planning and an effort to identify all major issues that may arise. Theyinclude detailed and objective assessments of IT capabilities, technologies and architectures,including the investment required for successful integration. 7 IT Integration during M&As
  • 9.  The due diligence/planning phase. The critical point here is that you dont need to rush the integrations – take time to plan and communicate first. In this phase it is crucial to make an assessment of the infrastructure and application integration opportunities. Deliverables: • Integration Blueprint – Principles, strategy, and a pragmatic approach with clear migration paths and workable operational model. • Milestone Plan – Predefined set of objectives, project controls and clear definitions of the governance process, in sync with corporate governance. The welcome/signaling phase. During this stage, focus on a few visible changes, such as merged e-mail.The business and IT team should come together and create a set of pre- defined critical success factors. Deliverables: • Portfolio Management – Clearly defined, value-driven project priorities and portfolios. • Contingency Plan – Clearly defined, with interdependencies and integration points. The initial/commercial phase. This is where the critical integration work begins, and generally its focused on regulatory issues or financial-management information systems. Deliverables: • Readiness Plan – Maps key strategies to make each stakeholder ready and able to deliver and benefit from the desired outcomes stated above. • Monitoring Framework – Provide accurate, detailed and adaptive monitoring of all of distributed computing components and data, including the network. The main integration phase. This is where you get down in the trenches and connect the big processes and systems. Follow the rationalization framework after selecting the best approach from the following four options: I. Parent Company Approach – In this soft approach the two merging entities will run their systems concurrently for a while and choose the best later. II. Old Legacy Approach – In this approach the strategies, best practices, processes, systems, etc., of one of the entities are adopted by the new organization. III. Best of the Breed Approach – In this approach the strategies, best practices, processes, systems, etc., of one of entities are adopted from the other. IV. Clean Slate Approach – In this approach, the merged business starts with a clean slate, using brand new systems. 8 IT Integration during M&As
  • 10. Deliverables: • Communication Plan – Deals specifically with crisis communication, and will have to coincide with the corporation’s various safety and emergency plans. It should have a matrix of notification priorities covering all possible routine and emergency events related to IT services, support and planning, and list responsible parties, affected groups (stakeholders), and preferred communication methods. • Resource Plan – Should show the breakdown of the major resource types that are needed for the integration project. The reap-the-benefits phase, which is self-explanatory, but does include assessing what youve learned in case you have to do it again. Deliverables: • Successful integration will create a single, well-organized and fully integrated entity able to achieve the objectives of the transaction.Mentioned below arefew good examples of frameworks that areused for IT integration:Framework for rationalization of infrastructure and applications: (Source: Infosys technologies) 9 IT Integration during M&As
  • 11. Framework for IT integration: (Source: Infosys technologies) 10 IT Integration during M&As
  • 12. Benefits:  Help the organization to bring out the synergy from the M&A o Booz Allen analysis has found that about 15 percent of the synergy to be captured from a merger comes directly from savings on IT operations. With another 25 percent stemming from business operations where savings are dependent upon IT, the simple fact is this: $2 of every $5 in merger synergy comes in some way from IT.  Improved post-merger data integrity and standardization  Reduced operating cost of the resulting entity  Completion of the M&A activities in a planned manner with improved speed  Integration, consolidation and retirement of redundant applicationsConclusion:Appropriate focus on IT integration is the key to capturing most functional and operational synergiesand leveraging existing IT infrastructure. The IT team must have a place at the diligence table, and it’simportant to develop a vision, strategy and blueprint for how IT integration plan will contribute to theM&A success without interruption, even as the structure of IT organizationitself changes as the result ofthe deal. 11 IT Integration during M&As
  • 13. Annotated bibliography: • Manjari Mehta, Rudy Hirschheim, "A Framework for Assessing IT Integration Decision-Making in Mergers and Acquisitions," hicss, vol. 8, pp.80264c, Proceedings of the 37th Annual Hawaii International Conference on System Sciences (HICSS04) - Track 8, 2004 This article highlights the importance of using a structured technique to tackle the IT Integration issue. • David Aponovich, Mar 27, 2002, “IT Integration Seen As Key to Merger Success”. Success.htm This article provides citation to different studies conducted on the issue and provides tips on effectively managing IT integration for a successful M&A. • Mohan Bhatia, 2007 “IT Merger Due Diligence: A Blueprint”. diligence.pdf This article focuses on being proactive and using the IT due diligence for minimizing the complications in the issue. • William B. Rouse, 2006, “Enterprise transformation: understanding and enabling fundamental change” - John Wiley and Sons This book provides some examples and learning’s from failed M&As like HP and Compaq merger • Laurence Goasduff, October 25, 2006, “Gartner Advises CIOs to Develop Their Approach to Mergers, Acquisitions and Divestments” – Gartner press release. This article provides ten practices used by experienced CIO’s to manage IT integration during M&As • AshwaniArora, Senior Project Manager - Banking and Capital Markets, Jan 2011, “System integration during M&A: How much to integrate?” – Infosys Technologies This article highlights the key factors that should be considered in planning the IT integration during M&As. • Shaun Rein, June-2009, Why Most M&A Deals End Up Badly, This article identifies the possible pitfalls of mergers and sights different examples related to the issue. • David F. Carr, Dec-2008, What IT Leaders Need to Know About Getting Mergers Done Right. Right This article provides critical advice for CIOs to manage IT integration during mergers. • W Menge - 3rd Twente Student Conference on IT, 2005 – Citeseer, “Pre-merger IT Strategies.” The paper mentions how organizations could anticipate mergers and structure their IT to avoid problems in future mergers. • Stefan Henningsson, "Strategic Value of IS Integration in M&A--The Relation between IS Integration and M&A as a Tool for Corporate Strategy," hicss, pp.221b, 40th Annual Hawaii International Conference on System Sciences (HICSS07), 2007 This articles specifies how absence of insight into the relation between IS and M&A hampers the development of the scientific field and distract business professionals. • Zhao, Jun, S.M. Massachusetts Institute of Technology, 2006 , “The IT integration of mergers & acquisitions” This academic research article investigates factors that influence the effectiveness of IT integration in M&A. 12 IT Integration during M&As