IS Issue: IT Integration during M&A


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M&A’s are among the biggest challenges for companies and their IT organizations to navigate. They often create issues that cannot be dealt with conventional leadership and management techniques. The role of information systems in mergers and acquisitions (M&A) becomes increasingly important as the need for speed of reaction and information is growing.

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IS Issue: IT Integration during M&A

  1. 1. Issue of IT integration during M&As Amit Pawar Katz Graduate School of Business Fall 2011
  2. 2. Issue of IT integrationduring M&As:M&A’s are among the biggest challenges for companies and their IT organizations tonavigate. They often create issues that cannot be dealt with conventional leadershipand management techniques. The role of information systems in mergers andacquisitions (M&A) becomes increasingly important as the need for speed of reactionand information is growing. Mergers and acquisitions may disrupt the operations of theorganizations involved. Executives who underestimate or disregard the costs and timeassociated with merging computer applications, infrastructure or IT organizations willface unpleasant surprises. However, if carefully planned and properly managed, themerger/acquisition and the resulting integration process can become an opportunity tostrengthen the capabilities of the combined organization and place it in a bettercompetitive position.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.The issue is highlighted in various consultant white papers:  "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.  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.
  3. 3. 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.Most of the experts generally agree on using the following approaches to resolve theissue: • Drive the IT integration program based on a vision of future IT capability: This "future vision" of IT capability led to IT stability more quickly, which led to greater financial value of the merger. • Involve IT early in business discussions about the deal: Companies that involved IT leadership in the pre-deal business planning were more likely to reach financial goals of the merger. • Perform an IT due diligence before the deal is signed: Companies that did realized a greater financial value and a "more successful integration experience." • Engage in detailed IT integration planning: Detailed planning helped companies to identify and prioritize the activities that were "most likely to deliver value." • Appoint a dedicated IT integration team and manager to oversee the IT integration: The best way to make IT integration a priority is to identify core resources that will work full time on the integration plan.Some experts suggested a different approach to address the issue: • Use external staff to help execute the IT integration activities: This helps companies fill temporary capability gaps during integration work. • Engage in IT cultural change and human performance-related programs: Survey respondents told Accenture the most difficult post-merger challenges revolved around human or cultural issues - integration of cultures and reorganization of personnel. Accentures report notes: "Planning must occur that is focused on the overall change journey and the methods by which people in the organization own the changes that are occurring and embrace the work of the new company."
  4. 4. Relevant coursework to understand the problem: • Strategic Management • Technology Enabled Business Transformation • IS Planning • Strategic Management of Acquisition and DivestmentGeneral ideas those are useful for characterizing the problem:If the issue is identified before merger the IT organization will be better geared up tomanage post-deal IT implementation risks.Following steps can be taken to improve the • Assessing the current IT environment and making necessary improvements, • Training staff to handle specific integration efforts • Creating proper documentation and periodically conduct a capability assessment IT systems • Developing integration principles and templates for due diligence and planningAcademic Research:An example of academic research activity to develop aframework for addressing the issue is given below.Source: University of Twente – New Zealand
  5. 5. General issue this problem is related to:Issue: 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 identified challenges with 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.
  6. 6. 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 effectivenessof IT integration in M&A