M&A Consultative Services

The Role of Information Technology in Mergers and Acquisitions

By Peter Blatman, Principal, Deloitte Consulting LLP, Mark Bussey, Specialist Leader, Deloitte Consulting LLP, Jeff Benesch, Senior Manager, Deloitte Consulting LLP
Introduction The rationale behind prospective merger/acquisition transactions is the expectation of specic business benets such as increased market share, reduced joint operating costs, and a more integrated value chain. These potential Mergers and Acquisitions (M&A)-related benets are usually directly linked to anticipated synergies including, but not limited to, shared overhead, economies of scale, cross-fertilization and operational integration. What is sometimes overlooked or underestimated is the crucial importance of effective IT integration in achieving anticipated synergies. Examples include: Shared OverheadReduction of IT support costs through consolidation of IT platforms Economies of ScaleShared IT procurement Cross-fertilizationMining of joint customer database information Operational IntegrationIntegrated production, forecasting and logistics systems Evidence of the importance of IT to achieving M&A related benets is reected in numerous market studies over the past 10 years that indicate 50% - 70% of merger and acquisition transactions fail to ultimately create incremental shareholder value1. While there are many reasons for the low rate of success, failed post-merger integration stands out as the most common root cause. This paper addresses the essential role that we believe IT must play in the full cycle of M&A activities, from pre-merger integration planning to post-merger integration, with the goal of increasing shareholder value from the deal. We dene the four basic IT integration models, Preservation, Combination, Consolidation, and Transformation within the context of the four pillars of M&A and ways they can be pursued in parallel with both IT and the business. The four pillars are: Strategypicking the right model for integration Due diligencegetting the right information upfront Post-merger integrationaligning systems and processes Executioneffectively implementing the merger or acquisition Deloitte research, data, and practical experience gained from providing consulting services support our position regarding the importance of closely aligning IT and M&A processes to maintain post-transaction momentum, and to increase the potential of achieving the dened business goals of the transaction.
1 Bloor Research, Nov. 2007; Deloitte 2000: (Solving the Merger Mystery, Maximizing the Payoff of Mergers & Acquisitions), etc. There are numerous studies that support the statement above. Fewer than 30% of merging companies improve shareholder value ve years after the acquisitions have been completed - Does M&A Pay? Robert F. Bruner, Chapter 3, Applied Mergers & Acquisitions, John Wiley & Sons, 2004 2 Merriam Websters Online Dictionary. http://www.m-w.com/dictionary/synergy.

The Quest to Capture Synergies Synergy. The word is overused, to be sure, but it has real meaning for companies engaging in a merger or acquisition process. Synergy is dened as, a mutually advantageous conjunction or compatibility of distinct business participants or elements (as resources or efforts) 2. Creating these advantageous conjunctions and compatibilities can have signicant benets for companies pursuing M&A activities. Some potential benets include: Increased market share Expanded technical and management capabilities Reduced costs through economies of scale Improved market position Increased assets Diversication Integration along the value chain These potential M&A benets are linked to anticipated synergies. However, synergies are meaningless unless their source can be identied, and expensive to capture if they dont add real economic value to the newly merged entity. Some synergies are produced by shared overhead through greater economies of scale. Others result from cross-fertilization of cultures and knowledge transfer. Still others come from operational integration and synthesized capabilities. These synergies can add value by producing the benets discussed abovebenets such as reducing costs, increasing market shareas well as by enabling the newly created entity to enter or create new markets, thereby expanding their reach nationally or globally. These benets have one thing in common: they are realized through effective planning and execution of pre-and post-merger activitiesespecially the integration of the merging entities IT processes and systems. Figure 1 on the following page depicts how properly integrated IT processes and systems can help achieve anticipated synergies post M&A.

Figure 1: Benets of Effective Information Technology Integration

Reduce Costs Shared Overhead Economies of Scale Cross-Fertilization Operational integration Synthesis of Capabilities Eliminate duplicate IS role and functions Reduce support costs through standardization Common technologies, platforms and systems Combined IT procurement Groupware Intranets Workow Integrated operational systems for example, production, forecasting and logistics Workow engine CAD IT technology transfer State-of-the-art scheduling, forecasting or yield management Global systems Customer database Data mining Order-entry or customer-facing systems Data warehouse Internet presense Uncommitted product and customer models Combined electronic delivery Channel infrastructure Selling derivative information Channel innovation Truly integrated products/services Cross-industry business models Content/ context/conduit Increase Market Share Enter or Create New Markets

Failing at the Quest: What Goes Wrong Through our experience serving multiple companies in a variety of industries, Deloitte has observed that one of the most frequent causes of failure to achieve expected M&A-related benets is poor planning and execution of the merger project. Poor IT integration, especially the integration of disparate IT architectures, can be extremely detrimental. Applications, data and infrastructure should enable efcient and effective business processes. Without effective planning and execution of the right IT integration strategy, the capture of sought after synergies between the acquiring and acquired companies will likely fall short of expectations. In a recent effort to quantify the relationship between IT integration and M&A success, we conducted a survey of over 50 M&A (including divestiture projects) transactions from 2005 2007 to test the following hypothesis: The lack of attention to pre-merger strategy setting, IT due diligence, postmerger IT planning and execution, as well as poor IT/business coordination, are dominant factors in explaining the empirical rate of M&A success. Our ndings were consistent with this hypothesis. Our survey results suggest that while IT typically has limited impact on the valuation of the deal, early involvement of IT in due diligence is critical to the effective identication of synergies and the effectiveness of subsequent post-merger planning and execution. While the data with respect to the role of IT integration and its impact on the results of M&A transactions is not conclusive, when taken together with anecdotal evidence, the hypothesis is compelling. The available evidence points to a straightforward approach to M&A deals that will signicantly improve the odds of achieving the expected benets. Getting it Right This straightforward approach starts with the recognition that IT activities must be closely aligned with business activities during the M&A process. As we highlighted earlier, there are four dimensions to an M&A transaction: Strategy Due diligence Post-merger IT integration planning Execution These dimensions apply to IT as well as business activities. How well companies navigate each of these dimensions during the M&A process especially as they apply to IT integrationwill play a large part in determining whether or not the merger or acquisition ultimately achieves the expected benets. Strategy Companies vary, of course, in their motivations to pursue M&A deals. Some are pioneers. The reasoning for the merger is to combine two (or more) entities to create a better future. These companies are most likely to have the desire to seek out synergies as their main motivation for the combination. Others are talent scouts. Often in this scenario, the acquiring, or larger entity, wants to acquire knowledge or capabilities that it doesnt have. These companies also desire to create synergies with the combination. Then there are the consolidators. These companies seek mainly operating value from the merger or acquisition. Finally, there are the revenue hunters. These companies desire operating value from the combination, but their main motivation is growthin revenue and in size.

These differing agendas are the dominant drivers of post-merger integration focus, complexity and intensity. The more synergies the companies seek, the more complex the post-merger integration will be. Companies who set a high level of ambition/expectation for post-merger synergy must place signicant focus on external stakeholder management and integration management as the merger or acquisition progresses. Whatever the strategy chosen, there are critical success factors that will help improve the odds of achieving the expected benets. They are: The business must be accountable for setting the IT integration strategy Make the integration strategy explicitconsolidation, transformation, combination, or preservationeach has specic critical success factors and risks Set realistic targets and concrete performance measures for meeting the targetsas well as consequences for not meeting them Due Diligence No matter the merger agenda, due diligence is not an optional process. Performing due diligence, especially with regard to information systems compatibility and integration issues, is absolutely critical. When correctly performed, due diligence can help identify risks and opportunities. The risks include sources of instability requiring immediate action. Opportunities to reduce costs, leverage resources or assets in new areas, and to improve IT effectiveness and increase business exibility can be identied and pursued. Moreover, during the due diligence process, decisions or actions that will be needed before there is any signicant progress on the merger or acquisition can be identied. Expectations can also be set. For example, order-ofmagnitude estimates of expected costs and anticipated benets can be developed, and resources and timeframes required to address risks and issues and to capitalize on opportunities can be identied. Finally, due diligence should conrm how much (or how little) compatibility there is between IT architectures and assets of the merging entities. As with the process of setting the strategy, there are critical success factors in performing due diligence that will help improve the odds of achieving the expected benets. They are: Form an IT integration team early in the due diligence process Get the right people on the teamboth internally and externally. These people should have cross-functional knowledge and experience, and be able to see the big picture going forward Set a broad due diligence scopefrom assessing the IT environment to assessing risk and identifying potential synergies Set the baselinethe knowledge base that must be in place to move forward with the M&A process The bottom line is that IT due diligence should result in a high level action plan to mitigate identied risks, resolve key issues, and capitalize on major opportunities. Post-Merger Integration PlanningThe Model Makes the Difference Once due diligence is nished, the results can be used to push forward with post-merger integration planning. When two companies merge, or when one acquires the other, there are a myriad of scenarios in which the combination can occur. In general, there are four models or approaches that can be applied to post-merger integration of most M&A transactions.

They are: ConsolidationCalls for the rapid and efcient conversion of one company to the strategy, structure, processes and systems of the acquiring company CombinationMeans selecting the most effective processes, structures and systems from each company to form an efcient operating model for the new entity TransformationEntails synthesizing disparate organizational and technology pieces into a new whole PreservationSupports individual companies or business units in retaining their individual capabilities and cultures The approach a company chooses is dependent on its goals for the new entity. More specically M&A business objectives usually reect the acquiring companys acquisition prole and business agenda, as discussed in the Strategy section above. Figure 2 below depicts how the adopted integration approach should match the business objectives and acquisition prole. Key questions to ask when choosing a model include: What are the main business objectives of the merger or acquisition?e.g. growth, market positioning, cost savings? What key benets are expected from the transaction? What approach to business integration is required to realize these benets? What approach to IT integration is required to realize these benets? In what ways can IT help the business realize its goals for the transaction? What opportunities exist to use technology to position the business for future growth and change? For each model, the critical success factors, as well as the causes of potential failure, are strikingly different. Figure 3 below depicts some of these critical success factors and potential causes of failure. In addition to critical success factors for each integration model, there are critical success factors for the overall integration that will help improve the odds of achieving the expected benets. They are: Close integration between the IT integration planning and business process and organization planning Appoint a full time project manager under an IT integration project management ofce, (PMO) linked to a company-wide PMO Decide the future state of the IT organization, processes, and architecture Create specic project plans based on which integration strategy is chosen Create and maintain a broad communication plan that keeps everyone in the loop

Execution Each of the four post-merger IT integration approaches has associated execution priorities and management issues that must be addressed. The execution priorities focus on process and technology integration. The management issues include leadership and cultural blending challenges. For example, with a consolidation approach to IT integration, the focus is on risk management for process issues and on data conversion for technology issues. With a combination approach, the process focus is on systems evaluation and the technology focus is on systems integration. With a transformation approach, the process emphasis is on innovation; the technology emphasis is on the overall IT architecture. Finally, with a preservation approach, stakeholder management is the focal point of process issues, while communication between business units is key for technology concerns. Management issues can be challenging, even in the smoothest of M&A transactions. The blending of organizations and cultures is not easy because no matter the industry, no two companies evolve in quite the same manner. Each will each have different leadership styles and cultures. To facilitate the transition to the newly-merged entity, each post-merger IT integration approach will have to deal with different management and cultural issues . For example, the typical leadership style in a consolidation approach to IT integration is an authoritarian approach that imposes the will of the acquiring company onto the company being acquired. The culture of the acquiring company is also imposed (as much as possible) on the new entity. In a combination approach, the leadership is more collegial and there is a knitting together of corporate cultures. In a transformation approach, there is often inspirational leadership that seeks out new ideas and synergies more than with any of the other approaches. There is often a new corporate culture that is sculpted from select parts of the prior cultures. With a preservation approach, the leadership style is most effectively described as respectful, with leaders of both companies retaining autonomy and with the cultures of both companies remaining largely unchanged. Why all the discussion about leadership styles and process issues? Because these issues directly affect how smoothly (or not) the post-merger IT integration will proceed. As with the other three dimensions of post-merger success, there are critical success factors for the execution of IT integration that will help improve the odds of achieving the expected benets. They are: Execute the post-merger integration in a timely manner. The longer it takes, the lower the realized value from the transaction Develop, track and report on project performance metrics Measure and publish realized benets. This will establish goodwill in the newly merged entity going forward

Figure 2: The Approach to match the Acquisition Prole

Reason for Acquisition Consolidator Approach Capture efciencies Open new geographic markets Open new market segements Revenue Hunter Acquire new products Buy into new distribution channels Talent Scout Acquire expertise Buy new or superior technology Pioneer Develop a new business model Consolidation Combination Transformation Preservation

Figure 3: Success Factors and causes of M&A Failure

Consolidation Success Factors Detailed implementation plans Rapid systems conversion Uniform and consistent implementation Combination True collaboration Commitment to preserving the most valuable parts of both organizations Prociency at synthesizing disparate systems/technologies Causes of Failure Sqandering exploitable assets Alienating key people Overlooking possible synergies Long-drawn-out assessment exercises Unresolved issues Inefcient/complex patchwork of systems Transformation Compelling vision of new organization Unwavering focus and committed leadership Substantial expertise in change management Organizational resistance to change Unrealistic goals Failing to balance long-term benets Preservation Protection of autonomy; prevention of chaos Restrained management involvement Rigorous operational monitoring Excessive inefciency Unneccessary duplication Missed cost and operational synergies

Wrapping it Up The M&A transaction process is not easy. It is fraught with pitfalls and roadblocks to achieving the expected benets that must be carefully navigated and overcome with skill and care to achieve the goal of one new, (hopefully) improved organization from two separate, distinctly different companies. While there are many hurdles that must be surmounted in any M&A transaction, the one that most frequently poses a challenge is how to plan for and execute the post-merger IT systems integration. Consequently, proper selection and execution of a post-close IT integration plan in a timely manner can help achieve any anticipated synergies from the M&A transaction. Our experience indicates that the better the post-close planning and execution, the better to overall merger results, and that a key attribute to effective post-close integration is a high level of integration between IT and the business. To achieve this, effective IT due diligence and speed of integration are critical. Any post-merger integration approach chosen should be guided by the M&A business objectives, and the selected approach (consolidation, combination, transformation, or preservation) should match the business objectives and acquisition prole. Each of these approaches has its individual characteristics, success factors, and potential causes of failure and should be selected with a full understanding of which approach most effectively ts the particular M&A transaction and which would work well with the IT integration issues uncovered in the due diligence process. Each approach should be executed in a timely manner to realize the expected value from the transaction and benets should be tracked and championed throughout the new organization to promote acceptance of transition to the new culture. To improve the odds of achieving the expected benets, it is very important to consider the four pillars of M&A: Set the strategydevelop and carry out the IT and business integration strategies in parallel Dont skip on the due diligenceform an IT integration team early on and cast a broad net to identify potential issues and roadblocks to success Plan the post-merger IT integrationclosely align IT integration planning and execution with business planning and execution Execute the post-close IT integration speedilyexecute fast and nimbly. The longer it takes, the lower the realized value Following this path wont ensure that the expected benets are achieved nothing is guaranteed. However, proper planning and execution of postmerger IT integration can make the process easier and more effective to increase the likelihood of achieving the expected benets in the long run. Thats a win-win deal.

Authors and Contacts: Peter Blatman, Principal Deloitte Consulting LLP 415-783-6169 pblatman@deloitte.com Mark Bussey, Specialist Leader Deloitte Consulting LLP 469-417-3566 mbussey@deloitte.com Jeff Benesch, Senior Manager Deloitte Consulting LLP 408-704-4886 jeffbenesch@deloitte.com

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