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Whether you are involved in your first M&A transaction or are a seasoned pro, we believe
this compendium has something for you. It contains insights, approaches, tips and
recommendations developed as a result of the consulting services Deloitte* has provided to
clients of all sizes and across all industries. IT professionals, at all levels of experience, should
find useful ideas to consider as they address their current or pending IT-related M&A due
diligence, planning, and post-transaction integration activities.
To us, the role of IT in business has never been more significant than it is today. IT is a
critical enabler of virtually every operating element in contemporary organizations, and
timely access to information is unquestionably of paramount importance. The ability to keep
one’s company “on the rails” while simultaneously executing a complex merger, acquisition,
or divestiture is a skill which needs to be part of every contemporary CIO’s repertoire.
As the second installment in our Making the Deal Work series, each article in this
compendium can stand alone. But taken together, these articles offer an in-depth look
into M&A IT issues, ranging from the overall role of IT in M&A transactions to effective
construction and execution of a Transition Services Agreement (TSA). Whichever topic grabs
your interest, we hope the information we present here can augment your thinking. And,
if you’re looking for a broad perspective on M&A, check out the introductory issue of this
series, Making the Deal Work – Perspectives on driving merger and acquisition value.
Whether this is your first acquisition — or your hundredth — Deloitte is here to help. As
acknowledged by many industry analysts, our experience in assisting clients across the full-
spectrum of IT-related M&A activities is unmatched. If you’re looking for a seasoned advisor
with real-world experience, we’re ready to help.
*As used in this document, “Deloitte” means Deloitte Consulting LLP, which provides consulting services; Deloitte & Touche LLP, which provides audit and enterprise risk services; Deloitte Tax LLP, which provides
tax services; and Deloitte Financial Advisory Services LLP, which provides financial advisory services. These entities are separate subsidiaries of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed
description of the legal structure of Deloitte LLP and its subsidiaries.
Making the deal work
Table of contents
1 Introduction
11 Don’t forget IT! Eight simple ideas to help reduce IT-related M&A risk
13 A new house begins with a blueprint: Day One and end-state IT blueprinting
16 Where in the world is IT? During M&A is a good time to ask old questions, again
41 M&A IT benefits with no deal involved: Simple ideas for realizing M&A benefits
without a transaction
VII
Wired for winning?
VIII
Wired for winning?
M&A IT – Integration
45 Walking the M&A IT tightrope: Establish a safety net of M&A capabilities before
integration begins
47 Virtual fences: Five ways to retain IT people when you need them most
M&A IT – Divestiture
65 Time to leave the nest, kid: 13 tips that could ease the transition of a carve-out
69 Fast break: A way to design and manage TSAs to achieve a fast and
clean separation
73 Breaking up is hard to do: Five questions for every CIO whose company is
divesting a business
Appendix
79 About the contributors
IX
Wired for winning?
Introduction
In 2007, Deloitte published Making the deal work — Perspectives on About this book
driving merger and acquisition value. This compendium of 22 articles
The perspective that Deloitte brings to this compendium is both broad
was written by practitioners from Deloitte’s Mergers & Acquisitions
and far-reaching. As a premiere global IT consulting firm and a leading
Services service line — professionals with a wealth of experience in
provider of M&A consulting services, we brought to this effort an
helping companies of all sizes and across all industries, in their efforts
unusual ability to see and to identify ways to address the complexities of
to achieve meaningful results in an often volatile and unpredictable
M&A IT across multiple dimensions: strategic, operational, technical, and
landscape of acquisition and divestiture transactions.
financial. We believe it is from this integrated perspective that the CIO
Making the deal work focused on a simple, but disturbing observation: can benefit as they develop their approach to managing expectations
The majority of, M&A deals fail to achieve the intended outcomes for and performance and, in doing so, enhance IT’s contribution to overall
the participants! As the introduction to the book says, “acquisitions M&A results. Here is a brief synopsis of the articles in this collection:
are complex, difficult undertakings…Even the most sophisticated M&A
M&A IT – The IT landscape
teams may be just one deal away from a major misstep.”
• Will you sink or swim? Can you pull off this deal without outside
To give companies something to consider in support of their efforts M&A IT consulting support? introduces critical transaction-related
to achieve their intended results, Making the deal work laid out a and organization-related factors to consider when deciding whether
disciplined, integrated M&A methodology that addressed all aspects of a to engage outside M&A IT consulting support, and includes the
complete M&A transaction, beginning with strategy and due diligence, M&A IT Intelligence Quotient Assessment Tool™ that you can use to
continuing through transaction execution, and ultimately to the help assess your organization’s ability to complete a current M&A IT
complexities of post-merger/divestiture integration and reorganization. transaction.
To cite just a few of the titles in the compendium — Avoiding merger
failure, Putting synergies to work, Navigating a global merger, Leading • Don’t forget IT! Eight simple ideas to help reduce IT-related M&A risk
practices for an effective transition, and Post-merger indigestion — hint discusses the importance of involving IT early in the deal process.
at the wealth of information between its covers, information both In fact, it presents findings from a Deloitte study that shows a clear
provocative and practical. correlation between Day One effectiveness and IT involvement in due
diligence and integration planning.
The compendium was very well-received by executives, who asked
• A new house begins with a blueprint: Day One and end-state IT
for more information, especially in one area of universal concern: IT
blueprinting discusses the importance of planning in achieving synergy
integration. So, we decided to assemble another compendium, this
and illustrates the use of blueprinting as a useful tool for rationalizing
one addressing the particular opportunities and challenges inherent in
technology so the new company’s IT profile can support its strategic
trying to bring together or carve out an IT organization. The result of
goals while eliminating IT redundancy and waste.
our effort is the book now in your hands, Wired for winning? Managing
IT effectively in M&A. Herein, you’ll find 20 articles, again authored • Where in the world is IT? During M&A is a good time to ask old
by seasoned practitioners, who are well-versed in the importance and questions, again urges the CIO to use the M&A event as an excellent
complexities of M&A IT. opportunity to ask an old question, again: Which service delivery model
is most appropriate for the new business? Old decisions — about
The articles — covering the intricacies of planning for and achieving outsourcing, offshoring, near-shoring, and onshoring — can take on
value from the “new” IT organization, completing purposeful IT due new dimensions when an organization changes its size or shape.
diligence, exploring the ways to capture synergy after the deal is done,
and detailing the complexities of bringing two IT organizations together • Raising the stakes of information: Effective information management
or breaking one apart — share a common premise: as IT goes, so for mergers, acquisitions, and divestitures discusses the many ways
goes the deal. IT’s role in the effectiveness of a merger, acquisition, or that IT can help enable the four primary drivers of enterprise value
divestitures is, simply put, critical. in mergers, acquisitions, and divestitures: revenue growth, cost
reduction, asset efficiency, and governance/risk/compliance.
Our hope is that this compendium will provide the CIO with ideas,
• Hedge your bets: The importance of IT risk management in M&A
approaches, perspectives and other information to consider as they
challenges the CIO to be assertive in addressing and resolving the
position their IT function for active participation in every stage of the
many threats to a deal’s value. The IT risk management framework
M&A lifecycle. In the long run, we believe much of the onus for achieving
presented here covers four primary areas of risk — integration,
post-deal synergy and value rests on IT’s shoulders. Consider this book the
technology, information, and business.
barbell you need to build enough “muscle” to carry the day!
• Built to last: Using an M&A event to build sustainable IT business value
recommends that IT facilitate its on-going value by aligning IT and the
business, rationalizing technology, and retaining knowledge workers.
These activities can help drive efficiency, effectiveness, return on
assets, and shareholder value.
1
Wired for winning?
M&A IT – Synergy capture • Building an integration roadmap: Key questions every CIO should
• The role of IT in M&A discusses the essential role that we believe ask includes a checklist for IT to consider to help them achieve
IT must play in the full cycle of M&A activities, from pre-merger synergies within the desired timeframe, facilitate an issue-free Day
integration planning to post-merger integration, with the goal of One, and keep the impact to key stakeholders inside and outside the
helping to increase shareholder value from the deal. organization low.
• Leveraging IT’s ability to drive post-merger business value presents • Managing your data tightly through an M&A event describes ways
a framework for IT to position itself to capture the full range of to plan for and manage the risks and impacts associated with data
benefits from an M&A opportunity through three levers: resource integrations, from understanding critical data, through assessing
management, work management, and business-IT alignment. its quality, to maintaining controls through the use of tools and
methodology.
• Ignorance is not bliss: IT due diligence is fundamental for post-merger
synergy capture presents practical tips to consider for conducting due • Cooking Lessons: A CIO’s guide to leading a first merger integration
diligence along multiple dimensions: business, operational, delivery, project serves up a five-step” recipe” to consider in preparing for
financial, and people. By asking the right questions, at the right time, an IT integration, including conducting due diligence, crafting and
the CIO can increase the likelihood that IT will deliver the anticipated implementing an IT integration plan, improving synergies, and
synergy of the post-deal enterprise. preparing for future mergers.
• M&A IT benefits with no deal involved: Simple ideas for realizing • Give IT a fighting chance: An M&A information technology integration
M&A benefits without a transaction shows ways an organization can framework presents an IT integration framework from A to Z — from
create a virtual M&A event to help them realize M&A-like benefits alignment with the business direction, through IT architecture and
of improving financial and operational performance without actually organization, to funding and governance — with the intent of helping
completing an M&A transaction. IT achieve the “readiness” that’s so important to a smooth and
successful integration.
M&A IT – Integration
M&A IT – Divestitures
• Walking the M&A IT Tightrope: Establish a safety net of M&A
capabilities before integration begins stresses the importance of • Time to leave the nest, kid: 13 tips that could ease the transition of a
having a “safety net” of capabilities — specifically, knowledge, carve-out offers the CIO for a carved-out IT organization 13 light-
processes and tools, and experience — before tackling the high-wire hearted, but highly practical, transition tips to consider as you try to
act of post-merger integration. All types of activities, from training to make it without a “parent” and achieve long-term prosperity with
M&A integration simulators, can help an IT organization get ready to limited short-term pain and failures.
effectively make it to the other side. • Fast break: A way to design and manage TSAs to achieve a fast and
• Virtual fences: Five ways to retain IT people when you need them clean separation illustrates factors to consider in creating an effective
most presents a down-to-earth way to address employees’ concerns Transition Services Agreement (TSA), one of the most crucial elements
about a merger, acquisition, or divestiture to help earn their of a divestiture. An effective TSA can help both buyer and seller
confidence and win their commitment to the transformation ahead. accomplish their respective goals.
• Breaking up is hard to do: Five questions for every CIO whose
company is divesting a business poses five questions the CIO should
consider in preparation for segregating systems and services as a
result of divestiture.
2
Wired for winning?
3
M&A IT – The IT landscape
In the world of deal-making, IT integration is often overlooked. And that’s as big mistake.
In nearly every case, IT is on the line for delivering synergy. The rewards of IT integration
Organization-specific factors
Introduction • Level of M&A experience (buyer and seller)
Over the past five years, 1,955 M&A transactions greater than • Number of available experienced M&A resources within each
$500 million and involving a U.S. buyer and/or seller, were IT organization
announced. In aggregate, these transactions represented almost • Level of each IT organization’s readiness
$5 trillion in value.1 In nearly every case, the CIOs and Information
Technology (IT) leaders of the parties involved (buyer and seller) • Each organization’s M&A history
asked themselves: Can we complete the integration/divestiture • Each organization’s M&A track record (positive and/or negative)
by ourselves? Should we consider engaging outside M&A IT • Each IT organization’s M&A track record (positive and/or negative)
consulting support?
• Complexity of each organization’s operations
These questions rarely have obvious answers. Good consultants • Complexity of each organization’s IT landscape
will respond to the question of whether outside support is required
with, “It depends.” Consultants who says, “yes,” without any • Competitive position of each organization
knowledge of your organization, the target organization, or the • Volume and complexity of existing nontransaction-related IT activities
transaction are likely just trying to sell you their time. Beware! and projects (buyer and seller)
Knowing this critical information can help you intelligently analyze your
IT organization’s ability to complete M&A transactions without outside
For CIOs and IT leaders, the answer to these questions does, in fact, M&A IT support — i.e., your ability to sink or swim.
depend on many factors. Some of these factors are transaction related
and some are organization related, as listed below:
Transaction-specific factors
Case study 1: Consistent user of external M&A IT consultants
• Type of transaction
Client: Multibillion-dollar, global company
• Size of the transaction
Transaction history: Completed a few M&A transactions prior to
• Nature of the transaction (friendly or hostile)
the last five years.
• Global transaction footprint
Transaction track record: Completed multiple transactions in the
• Degree of required IT carve-out (if applicable) last five years.
• Desired degree of IT integration (if applicable)
Transaction profile: Transaction type (acquisitions, divestitures,
• Complexity of IT-related integration issues and joint ventures), size (less than $1 billion–$20 billion+), and
• Size, complexity, and timing of IT-related synergy requirements complexity (medium to very high) have varied.
• Degree of similarities between the buyer and seller External consulting usage profile: Use external M&A IT
• Similarities between the buyer and seller consulting support to help them develop their internal M&A
capability (e.g., M&A IT playbooks, processes, and tools, as well
– IT application footprints as internal resource training). Consistently use external M&A IT
– IT infrastructure consulting support for ongoing transactions.
– IT delivery models External consulting usage rationale: Use consulting in support of
• Existence of IT outsourcing contracts IT due diligence, IT integration/divestiture program office support,
IT synergy identification and capture, and IT functional planning
• Anticipated duration of the transaction close window (announcement
and execution support and to supplement its internal capabilities
to regulatory approval to close)
and capacity. This has allowed key operations resources to remain
• Level of pre-deal operations and IT due diligence focused on the day-to-day operations.
• Volume and complexity of Day One business and IT requirements
• Volume and complexity of IT-related integration projects
5
Wired for winning?
Whether you are planning an M&A transaction or are currently engaged in a 2. Access to specific M&A IT techniques, lessons learned, and
transaction, carefully assess the potential need for outside support. One way to an independent third-party perspective. During an M&A
do this is to quantify your “M&A IT Intelligence Quotient” – Your M&A IT IQTM. transaction, there is always a need to complete transaction
Our M&A IT IQ Assessment ToolTM, included in this article, is designed to help
planning, analysis, and execution activities that are not typically
efficiently determine where a company’s potential transaction risks lay, where a
company should apply additional internal focus and resources, and whether a required as part of steady-state IT operations. Often, the
company should consider engaging outside M&A IT consulting support. resources, experience and skill sets required to complete these
activities do not exist inside the company.
A low M&A IT IQ score does not necessarily indicate that your
organization is doomed to failure if you do not engage outside assistance. As an example, you may have requirements related to integration/
It does, however, provide a quantitative assessment of the level of divestiture strategy development, IT organization design and
difficulty your IT organization will likely face in completing the transaction rationalization, IT synergy identification and capture, application
if you choose to go it alone. Many companies, and IT organizations and instance consolidation, system selection, legacy system
specifically, who have chosen to go it alone do effectively achieve their retirement, data center consolidation, network consolidation, IT
integration and divestiture goals. outsourcing contract setup, termination, or renegotiation, as well
You may be surprised, but our assessment tool consistently produces results as IT contract negotiations. Support from experienced consultants
that suggest companies should forgo or limit outside consulting support with an independent third-party perspective and access to time-
because the IT organization is prepared to effectively execute the transaction. tested techniques and lessons learned regarding these specific
While some IT organizations truly need help with specific transactions, others activities can be valuable to an organization.
can and should go it alone. Take 10 minutes and complete the assessment for
your situation. The answers and insights may surprise you. 3. Access to time-tested M&A IT methodologies, processes,
tools, and accelerators. Access to time-tested M&A IT
The benefits gained by engaging outside M&A IT consulting support methodologies, processes, tools, and accelerators cannot only
When indicated and appropriate, outside assistance can provide eliminate the need to reinvent processes and tools from scratch,
meaningful benefits to buyers and sellers. These benefits include: it can also facilitate faster execution time, shorter training
windows for resources, reduced overall cost, increased synergy
1. Access to experienced M&A IT practitioners and short-term identification opportunities, as well faster integration and
resource bandwidth. In most cases, companies do not have the divestiture. Access to rigorous and repeatable processes and tools
experiences from several hundred M&A transactions to draw from. are critical for M&A effectiveness.
Many consulting firms, however, do. Leveraging the experiences of
others, even on a limited basis, can provide significant benefits. 4. Personal career insurance. Your M&A transaction will likely represent
one your biggest career challenges. Many CIOs and IT executives believe
In addition, most companies do not have a bench of resources engaging outside M&A IT consulting support represents a logical, cost-
sitting and waiting for an M&A transaction to come along. effective project and personal career insurance policy. If the transaction
When a transaction does occur, companies often find it difficult achieves the desired results, nobody will question your use of outside
to respond to the short-term spike in M&A-related activities and consulting support. If the deal encounters problems, however, they will
requirements. Outside M&A IT consultants can often help fill the likely ask why you didn’t seek help.
gap with experienced M&A IT resources and advisors.
5. A good night of sleep. M&A transactions are one of the few
events in a company’s history where all functional, process, and
Case study 2: Serial acquirer – Occasional use of external organizational levers are at play. The transactions also often bring IT
M&A IT consultants organizations and their people to their breaking points. Engaging
Client: Multibillion-dollar, global company outside help that provides experience and a demonstrated track
record may be your only hope of getting a good night’s sleep until
Transaction history: Serial buyer and seller the integration or divestiture effort is completed.
Transaction track record: Completed more than 50 transactions in
the last 10 years. Outside consulting support cannot guarantee you a good
night’s sleep, but it can at least provide you with enough specific
Transaction profile: Transaction type (acquisitions, divestitures, experience, information, and knowledge to let you know when
and joint ventures), size (less than $1 billion–$25 billion+), and and why you should sleep well, and when and why you shouldn’t.
complexity (low to very high) have varied.
External consulting usage profile: Occasionally use external M&A
IT consulting support.
External consulting usage rationale: Occasionally use consulting
in support of IT due diligence, IT integration/divestiture program
office support, IT synergy identification and capture, and IT
functional planning and execution support and to supplement its
internal capabilities and capacity. This has allowed key operations
resources to remain focused on the day-to-day operations.
6
M&A IT — The IT landscape
External consulting usage rationale: Consistently use consulting Transaction track record: Completed more than 100 transactions
in support of IT due diligence, IT integration/divestiture program in the last 10 years.
office support, IT synergy identification and capture, and IT functional
Transaction profile: Transaction type (acquisitions, divestitures,
planning and execution support and to supplement its internal
and joint ventures), size (less than $1 billion–$20 billion+), and
capabilities and capacity. This has allowed key operations resources to
complexity (medium to very high) have varied.
remain focused on the day-to-day operations, accelerate transaction
close, as well as expand and accelerate value capture. External consulting usage profile: Rarely use external M&A
support for ongoing transactions.
The honest rule of thumb External consulting usage rationale: Typically do not engage
external M&A consulting support because the company has
You must evaluate how prepared your organization is for an upcoming developed and maintains internal M&A IT capability, experience,
M&A activity. The M&A IT IQ Assessment Tool is one method to help and staff.
assess your needs.
In general, if your overall M&A IT IQ score is less than 100, you should at
least initiate some conversations with a few outside consulting firms with
M&A IT experience. The conversations cost nothing, and you just might
get the key nuggets of information needed to jump-start your effort.
If your M&A IT IQ score is less than 80, you should seriously consider
engaging outside support. In addition, if you have a zero M&A IT IQ
score along any specific dimension, you may want to consider targeted
support in that area.
If your M&A IT IQ score is greater than 100, you probably would be
better off simply ramping up your internal team and getting them
focused on the job at hand. The worst type of consultant is one who
arrives at a client side with the meter running, watching a competent
client do its job.
7
Wired for winning?
W X Y Z [ \
2. What is the nature of transaction? Very friendly Very hostile
W X Y Z [ \
3. What is the global transaction footprint? 1 Country >50
Countries
W X Y Z [ \
4. What is the degree of required IT carve-out (if applicable)? No carve-out Significant
required carve-out
required
W X Y Z [ \
5. What is the desired degree of IT integration (if applicable)? No Significant
integration integration
required required
W X Y Z [ \
6. What is the complexity of IT-related integration issues? Minimal Multiple,
issues very complex
issues
W X Y Z [ \
7. What is the size, complexity, and timing of IT-related synergy Low $, low High $, high
complexity, complexity,
requirements? ample time limited time
W X Y Z [ \
8. What is the degree of similarities between the buyer and seller? Very similar Very different
W X Y Z [ \
9. What is the degree of similarities between the buyer and seller Very similar Very different
IT application footprints?
W X Y Z [ \
10. What is the degree of similarities between the buyer and seller Very similar Very different
IT infrastructure?
W X Y Z [ \
11. What is the degree of similarities between the buyer and seller Very similar Very different
IT delivery models?
W X Y Z [ \
12. Does the buyer and/or seller have existing IT outsourcing Neither have Both have
contracts multiple
contracts? contracts
W X Y Z [ \
13. What is the anticipated duration of the transaction close >12 Months <30 Days
window (announcement to regulatory approval to close)?
W X Y Z [ \
14. What level of pre-deal operations and IT due diligence did Extensive, No due
detailed IT diligence
you complete? due diligence
W X Y Z [ \
15. What is the volume and complexity of Day One business and Limited Large
scope, scope, high
IT requirements? limited complexity
complexity
W X Y Z [ \
Source: Deloitte Consulting LLP
W X Y Z [ \
2. What number of experienced M&A resources are available No resources Large
available number of
within each IT organization? resources
available
W X Y Z [ \
3. What level of readiness to complete an M&A transaction does Not Highly
ready ready
each organization have?
W X Y Z [ \
4. What is the past M&A history of each organization? No history Both have
significant
history
W X Y Z [ \
5. What is each organization’s M&A track record Both have Both have
history of history of
(positive and/or negative)? failure success
W X Y Z [ \
6. What is each IT organization’s M&A track record Both have Both have
history of history of
(positive and/or negative)? failure success
W X Y Z [ \
7. What is the complexity of each organization’s operations? Both are Both are very
simple complex
W X Y Z [ \
8. What is the complexity of each organization’s IT landscape? Both are Both are very
simple complex
W X Y Z [ \
9. What is the competitive position of each organization Both are Both are
struggling in market
within the market? the market leaders
W X Y Z [ \
10. What is the volume and complexity of existing Both have Both have
extensive minimal
nontransaction-related IT activities and projects non-M&A non-M&A
(buyer and seller)? workloads workloads
W X Y Z [ \
Source: Deloitte Consulting LLP
9
Wired for winning?
• If your M&A IT IQ score is 100 or higher, chances are that your IT organization is positioned and prepared to plan and
execute against your transaction.
• The limited complexity of your transaction, coupled with your organization’s level of readiness and experience with M&A IT,
should afford you a strong chance for achieving positive M&A results.
• If your score is less than 1 for any assessment question, however, consider placing heightened internal focus (potentially
supplemented with focused external support) on that particular area.
• If your M&A IT IQ score is between 80 and 100, chances are that your IT organization is positioned and prepared to plan and
execute against your transaction.
• The level of complexity of your transaction, coupled with your organization’s level of readiness and experience with M&A IT,
suggest that you should, at a minimum, initiate discussions with outside consulting firms with strong M&A IT experience and
capabilities. Although you may not elect to engage outside support, the conversations will provide you with valuable insights
and ideas that will likely improve your chances for achieving positive M&A results.
• If your score is less than 1 for any assessment question, you may want to place heightened internal focus (potentially
supplemented with focused external support) on that particular area.
• If your M&A IT IQ score is less than 80, chances are your IT organization may need some help to plan and execute against
your transaction.
• Due to the complexity of your transaction, coupled with your organization’s limited readiness and experience with M&A IT,
discussions with and engagement of outside M&A IT consulting support will likely provide significant benefits and improve
your chances for achieving positive M&A results.
• Investigate external consulting support options carefully. Just because your M&A IT IQ score is on the lower end of the scale,
it does not necessarily mean that your outside M&A IT consulting budget must be large. In most cases, flexible, cost-effective
support options are available that will provide very strong benefits and help to better manage your transaction risk.
Source: Deloitte Consulting LLP
Note: M&A Intelligence Quotient, M&A IT Intelligence Quotient, M&A IQ, M&A IT IQ, M&A IQ Assessment Tool, and M&A IT IQ Assessment Tool are trademarks of Deloitte.
Notes
1
Deloitte Consulting analysis based on Mergerstat Data, all transactions <$500 million involving U.S.-based buyer and/or seller from January 1, 2003, to October 31, 2007.
10
M&A IT — The IT landscape
By Mark Walsh, Janice Roehl, Anna Lea Doyle, and Nikhil Chickermane
Introduction
Case study 1: Incomplete IT due diligence
Based on our research, it is widely accepted that most mergers fail to
deliver their expected value. Countless studies have offered a variety of A large, global manufacturer purchased — and attempted to
rational explanations for this problem. Poor target screening. Insufficient integrate — a division of another large, global conglomerate.
due diligence. Lack of executive support. Large cultural differences. Role of IT
Poor execution.1 However, one important factor that we believe is often
overlooked is lack of early involvement by the Information Technology IT was not involved in due diligence and did not participate in
(IT) function. integration planning until after the deal was announced and closed.
Getting IT involved early and often throughout the M&A lifecycle Outcomes
is critical to an effective merger or divestiture. This shouldn’t be
• IT-related integration costs exceeded due diligence estimates by
too surprising, as most deal benefits rely heavily on IT systems and
more than $100 million
infrastructure. Yet many companies largely ignore IT during the
transaction, putting off detailed IT scoping and planning until the deal is • IT issues caused significant operational problems after the cutover
essentially done. And by then, it’s usually too late. • The TSA had to be extended because the buyer wasn’t ready to
The perils of ignoring IT operate independently
11
Wired for winning?
Case study 2: IT integration planning done right Case study 3: Making the most of a difficult situation
A company acquired a smaller competitor in order to improve its This merger involved two large insurance companies, each built from
market position. The company expected to achieve $100 million a series of prior acquisitions that had not been fully integrated. In
per year in synergy benefits. Day One was set to occur just 90 days addition to the integration challenges, the merger was touch and
after the deal closed. go for a long time due to an extensive and prolonged regulatory
approval process.
Role of IT
Role of IT
The aggressive merger targets were feasible because the company
had done extensive IT integration planning during the due diligence IT was involved in pre-deal due diligence, as well as extensive pre-
phase. It had mapped out an IT integration strategy and identified close planning and preparation. Operational efficiency comparisons
the major IT integration issues. In addition, the company used “clean revealed significant improvement potential and a compelling business
teams” to get a head start on planning and execution before the case to fundamentally change the IT infrastructure delivery model.
deal was finalized. Key IT integration tasks included combining Savings opportunities ranged as high as 60 percent for various
the companies’ ERP applications, IT infrastructures, and voice/data technology components, with a total IT synergy target of $75 million.
networks. One of the main challenges identified during due diligence
was that the two companies were running on different versions of Throughout the process, the CIO remained deeply committed to
their ERP systems, which meant that one of the ERP systems had to be transforming IT and meeting or exceeding the synergy target, even
upgraded before the integration could be completed. when regulators initially rejected the deal and it appeared as if the
merger might fall through.
Outcomes
Outcomes
• The ERP upgrade and subsequent integration were completed
on time and at minimum expense, largely due to the company’s • The merger ultimately was approved and completed
advanced IT planning • Annual IT savings of $189.5 million were identified (well above
• IT integration was completed in only eight months, less than half the $75 million target)
the time typically required for a large-scale merger • An issue-free Day One was achieved
• Throughout the integration process, people from IT and business • The combined organization effectively shifted to an outsourced
operations worked side by side to achieve the desired results IT infrastructure
Factor in IT costs and timing when valuing the deal. Make IT Get your priorities straight. Regardless of the transaction size or desired
investments a mandatory part of your valuation model. Although IT-related degree of integration, every deal has an impact on IT. Because IT resources,
costs are not significant to every M&A transaction, in some cases they can funding, and time are limited, it is essential to immediately inventory and
be very significant. The valuation model must include estimated costs for all assess all IT projects (even those not directly related to the deal) to verify that
IT projects that are required for capturing the expected short- and long-term they are still required and align with the company’s future direction. Priority
business synergies, as well as costs for software licensing and TSAs. should be given to IT projects that 1) link to critical Day One requirements;
2) enable or accelerate large synergy opportunities; or 3) are essential to
Get a head start on IT projects. “Clean teams” are groups of
implementing the company’s future strategic initiatives.
specialists that are given special access to restricted information before
the deal is complete. These teams typically focus on competitive areas, Keep the pressure on. An effective Day One is only the beginning. IT
such as sales and marketing; however, they can also provide an early projects that are critical to synergy capture and long-term-deal results often
start on time-critical IT activities. For example, clean teams can be used require many months to complete. To maintain critical momentum for an
to compare business and data models, assess the impact of the deal on integration or divestiture, it is vital that management stay focused on related
the company’s future IT landscape, and conduct detailed scoping and projects until the majority of benefits have been captured.
planning. In our experience, some of the most effective integration and
IT: The missing piece of the M&A puzzle
divestiture programs identified IT scoping and planning as a critical pre-
close activity and used clean teams to involve business and IT resources In our experience, companies that place a strong, early focus on IT and
in an active cross-company dialogue focused on key IT solutions. take deliberate steps to elevate IT as a key M&A activity enjoy a wide
range of benefits, including:
Use the integration/divestiture as a springboard to improvement.
Many companies have had significant results viewing an integration • Faster decision-making
or divestiture as an opportunity to reinvent and dramatically simplify • Faster IT solution development
their IT organizations, solutions, infrastructure, and delivery models.
Implementing such improvements is often faster and cheaper than • Faster value capture
blindly dragging an acquired business onto existing systems. Other • Fewer customer issues at cutover
creative approaches include: “adopt and go” (picking whichever • Less “throw-away” IT work
existing IT solution is a better fit, and then adopting it for the new
entity — regardless of which company it came from), migrating to the Regardless of the size and complexity of an integration or divestiture,
acquired company’s IT solutions, implementing outsource solutions, or the IT team’s speed and effectiveness is likely to have a big impact on
implementing new applications/packages. These creative approaches whether the deal ultimately achieves the expected results. That’s why
often result in more timely and cost-effective results and, in many cases, it pays to get the IT function involved early in the deal and to keep it
produce cleaner end-state solutions. involved throughout the M&A lifecycle.
Notes
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte, February 2000.
2
“Strategic acquisitions amid business uncertainty: Charting a course for your company’s M&A,”
Deloitte Research and EIU study, November 2007.
12
M&A IT — The IT landscape
By Mark Walsh, Asish Ramchandran, Anna Lea Doyle, and Joseph Joy
13
Wired for winning?
While the integration or divestiture strategy is being formed, IT should One of the biggest challenges for IT is working against a timeline not
be gathering and reviewing vital information about the budget, under its control. Nor is it under the control of the businesses. While
application inventory, asset inventory, organization/IT employees, everyone can pretty much agree on Day One requirements, the very next
projects, and contracts. How will the two IT functions come together? day the businesses will start wanting services. IT needs to be prepared to
(Or in the case of a divestiture, how will the altered IT function defend its priorities and prevent conflict. Blueprinting Day One and Day
continue?) How will applications be combined and rationalized? These Two strategies can help IT from getting pulled off track after Day One and
questions are multidimensional. For example, when planning for serves as a key communication tool with related functional teams and
infrastructure, IT needs to consider these variables: program leadership. (Figure 1 is an example of a blueprint of IT strategies
• Personal productivity (e.g., e-mail, handhelds, office automation, for Day One and Day Two.)
imaging, and collaboration) In what order should the rooms be built?
• End-user computing (e.g., client hardware, client operating system,
What projects will get IT to Day One and beyond? What
and terminal emulation)
milestones would effectively track progress?
• Security (e.g., audit/compliance tools, authentication, directory
services, encryption, network security, and virus protection) Building a house consists of many projects (e.g., lay the foundation,
build the roof, install the plumbing and wiring, plaster the walls) and
• Systems management (e.g., configuration management, asset
associated plans for completion — so does integrating two businesses after
management, change management, service/help desk, network
a merger or acquisition or separating two businesses after a carve-out.
management, performance monitoring, capacity planning, and
What projects will enable IT to achieve its Day One and Day Two strategies?
software distribution)
Against what milestones should each project’s progress be tracked?
• Storage (e.g., storage area network, network-attached storage,
direct attached storage, server backup software, backup hardware, Blueprinting can help IT identify and prioritize projects and milestones,
and storage management) as well as identify key dependencies and resource requirements.
Projects and associated milestones may also be driven by value capture
• Computing platforms (e.g., mainframe hardware, server hardware, requirements. Some may need to be completed by Day One, while
mainframe operating system, and server operating system) others may have completion dates of Day One +30, +60, +90, or even
• Telecommunications (e.g., firewall, wireless, voice, data, IP services, +365. We often suggest breaking up projects into 30-day segments
and protocols) the first year and quarterly segments after that. For the first year,
projects and milestones should be pretty concrete. (Figure 2 shows a
• Hosting (e.g., data center facility, disaster recovery, and
blueprint for the IT strategy to outsource data centers. In this sample,
maintenance services)
the project has expected synergy targets; by including this outcome in
In the case of an acquisition or divestiture, transition services agreements the blueprint, the CIO maintained visibility for this value delivered.)
(TSAs) come into play. By allowing the seller to provide services for a
specified time, a TSA can help enable business continuity, freeing IT to
focus on the immediate deliverables for Day One. For that reason, TSAs
are common for business applications and associated infrastructure.
Figure 1: A simple blueprint of IT strategies for Day One and Day Two
Example: • Continue to use • Migrate to buyer Asset manager Transition services • Develop data
Finance – Fixed assets same processes processes and agreement (TSA) separation plan
and systems systems from seller system
• Identify assets • Train fixed • Migrate information
migrating to buyer assets resources to buyer system
and book value
14
M&A IT — The IT landscape
How might the builders reduce the house’s cost? From foundation to roof: A blueprint makes for a better house
Where might IT find value capture opportunities? M&A blueprinting for IT is a comprehensive process, covering people,
processes, technology, and value.
Most mergers (and carve-outs) have value capture targets, and IT is
expected to contribute significantly to cost savings. Also, many business
functions depend on IT solutions to achieve their own synergies. In the People • Buyer (XYZ) provides IT support for all target (ABC)
blueprinting process, it’s useful to flag these synergies (as we did on enterprise/desktop/telephony support service
Figure 2) so that it’s clear whether the savings are IT-direct or IT-supported. • ABC IT staff are XYZ employees
For every synergy-driven project, IT should know the expected savings and
the cost required to achieve those savings: The net number is the amount Business • Desktops: XYZ standard (IBM hardware/Microsoft
IT can actually save the enterprise. Below are sample synergy questions that processes Software for Standard services) with ABC – specific
can be answered as part of the blueprinting process: (including startup screens for ABC employees
policies and • Applications: XYZ systems integrated with selected
• Do the two companies have the same functions and processes? metrics) ABC systems to support supply chain and sales
• Are some processes the same, but under different functions? force consolidation
• What are the applications supporting these processes? • E-mail: Lotus Notes, with @XYZ.com address for all
• Do the two companies have the same core systems? ABC employees
• Where are gaps and/or redundancies in contracts? • Telephones/voice mail/cell phones/pagers: XYZ
standard
• Should the two systems/applications be consolidated or kept independent?
• Desktop support: XYZ supplied
• Should one or both systems be retired?
• Servers: XYZ standard as refresh occurs
• What technologies are needed to achieve the new company’s strategy?
• IT policies: XYZ standard
• What are the current service delivery models and service level
agreements? Are they appropriate for the new organization? Systems, • A combination of XYZ and ABC systems
• What site services should continue or be stopped? tools, and • Shared services will be supplied by XYZ systems (HR,
data payroll, financials)
• Data will be backed up and stored on separate tapes
under XYZ contracts
15
Wired for winning?
But after that, the assessment process can quickly become complicated:
Introduction Emotions can run hot when one option is chosen over another, when
one company’s ways of working are deemed better than the other’s,
Usually when two companies merge, or when one acquires another, and when people have to give up a model they’re invested in and
Information Technology (IT) is challenged to reconcile two or comfortable with.3
more different service delivery models. Should IT be outsourced or
kept in-house (captive)? Should IT operations be located onshore, Do no harm on Day One: Who’s in control of processes that need
near-shore, or offshore? One company may have outsourced its IT to be integrated first?
processes, completely or partially; the other may have offshored its In preparation for Day One, IT has to be ready to support the new legal
IT function, again, completely or partially. Yet another possibility entity. Which service delivery model would most effectively enable a
is that either may have kept IT completely captive, onshore. Most smooth Day One? More importantly, which IT service delivery model
likely, each company has opted for some hybrid model combining would be most effectively suited to achieve efficient and effective
two or more of these options. ongoing operations? What level of integration — between both
Not surprisingly, the M&A event can suddenly make any or all of company’s existing IT organizations, as well as between IT and any
these arrangements wrong for any number of reasons, including offshore facilities or third-party outsourcers — is required for both a
redundancy (of processes, applications, or infrastructure), the smooth transition on Day One and ongoing operations after Day One?
voiding of contacts because of a change in ownership, or a poor The IT merger team needs to expose all risks to the integration process.
fit with the new company’s competitive strategies. Support value and stability: Which option most effectively
satisfies the needs of new enterprise?
So, as part of its merger mandate, IT has to ask, “What service
delivery approach is most appropriate for the new business?” While synergy in IT typically equates to cost cutting, in many cases
strategic opportunities or necessities come into play. Does the merger
While the task of answering that question can be daunting, there is or acquisition enable market expansion, cross-selling, increased
good news: The merger or acquisition can give the new company a flexibility, or better risk management? The IT service delivery model
second chance to get more service at the right cost. needs to contribute to those expectations, and IT’s consideration of
those variables can make all the difference in choosing a service delivery
model. What IT organization would most effectively support the
The context for choice company in achieving its strategic goals?
At the heart of the question “What service delivery approach is most One size does not fit all
appropriate for the new business?” is the significant role of IT in making
the merger or acquisition a financial success. In fact, IT is on the line Give three key drivers — cost cutting, post-merger integration, and
for three important results: synergy, Day One readiness, and ongoing value delivery — the company needs to choose an effective IT service
support of the new business. delivery model. While there’s no right answer, not all options are equal.
In fact, what’s right can and should vary based on the new company’s
Achieve meaningful synergy: Which choice will reduce costs unique objectives.
the most?
The first choice — to enter into an agreement with an external services
When a deal promises millions in synergy, the merger team is typically provider (outsourcing) or to keep IT part of a captive operation (in-
challenged to find those dollars in cost savings. The first place everyone house) — needs to fit advantageously with the new company’s scale,
usually looks is toward IT.1 The IT team might be expected to choose capital, and talent. For example, the CIO might ask, “Is outsourcing a
one company’s service delivery model over the other’s, or to combine viable choice?” IT Outsourcing (ITO) is a mature model and continues
elements from each, or to design a new completely new model for the to grow at a very impressive rate (Figure 1). Many different IT functions
new company. can be outsourced within a scalable solution (Figure 2). The key driver
The first step is to determine the relative merits of the many for outsourcing is typically cost savings or the ability to rapidly execute a
choices available by performing objective comparisons, analyses, strategy within the new company structure. If IT functions are not core
and assessments of the two legacy IT organizations. Usually, some to the business, retaining all of them in-house is typically not the most
redundancies become immediately apparent. Other times, the payoff effective answer.
in a substitution might be obvious: For example, one company might
already have a robust offshore facility or one company’s IT organization
might have the scalability and skills to replace the other’s outsourcer
(assuming no contractual penalties are triggered).2
16
M&A IT — The IT landscape
500
BPO
450 ITO
7.3%
400
5.3% 190
7% 177
350
13.8% 168
7.8% 157
300
USD billions
138
128
250 7%
7.9%
200 7.7%
7.8%
6.4%
150 290
271
233 251
100 203 216
50
0
2005 2006 2007 2008 2009 2010
Source: Deloitte LLP Analysis & Gartner (2006 Market Database)
Application
Requirements Quality maintenance Architecture IT Vendor Financial
definition Build assurance IT strategy
and support and standards procurement management management
(breakFix)
Design Testing
Project
Databases IT infrastructure
management
Less
Not typically outsourced Commonly outsourced
commonly outsourced
17
Wired for winning?
Once that decision has been made, the next question is, “Should we Real-world examples
locate IT operations onshore or offshore?” A site’s attractiveness depends
Outsourcing
on many factors. Labor arbitrage is the obvious driver in considering
locations (especially since IT compensation is highest in North America). Recently, a large health care service provider decided to outsource
But other geographical risks — political stability, talent availability, attrition the entirety of its IT infrastructure hosting to a service provider based
rates, language fluency, and time zone differences what might preclude in North America. This choice would allow the company to focus its
live interaction — need to be factored into the decision. energy and resources on core business needs aimed at growing its
market share. The company was growing rapidly and, for this reason,
A third option, called near-shore, is a relatively new option that combines
faced key decisions about the potential expansion of its existing data
some of the most desirable attributes of offshore and onshore locations
centers. Rather than trying to consolidate all of its aging computing
without some of the risks. For a company based in North America, a site
systems in a large data center, it decided to test the market for complete
in South America would be a near-shore alternative. While the command
IT infrastructure hosting. After a carefully led sourcing and selection
of English in South America might not be as high as it is in India, the
process, a vendor was selected and services were transitioned into the
closer geography could have some distinct advantages:
outsourcers’ data center.
• The ability to interact in near time is important for collaboration- The transition took less than six months from contract signature to
intensive projects or operations. go-live with no disruption of services. All systems and applications
• South America’s currencies are not as susceptible to inflation or were migrated to the new platform, thereby gaining the scalability
appreciations as compared to Indian currency (12 percent to 15 percent and flexibility needed to adapt in support of the anticipated market
increase, year after year).4 share growth. Additional efficiencies and substantial cost savings
• In South America, the job market for people with IT skills is less were also derived by leveraging virtualization, storage, and backup
competitive, so attrition is also lower. shared across platforms and by deploying additional technologies,
tools, and optimization techniques that had not been available within
As a result of these factors, many global companies have established the company’s existing environment because of lack of both expertise
captive centers in South America (mainly Brazil and Argentina), while and resources.
an increasing number of Tier 1 and other ITO service providers have
established, or are in the process of establishing, presence in these
countries and in surrounding ones (such as Chile). Figure 3 highlights
some key considerations in choosing between onshore, near-shore, and
offshore models.
18
M&A IT — The IT landscape
As a result of a strong governance program, clearly established service Business case. No matter what the choice — outsourcing, offshoring,
level objectives and service level agreements, and a committed effort domestic, or any combination — a strong business case, qualifying and
from the executives within the company to leverage the outsourced quantifying synergies both cost and strategic, is required.
partnership, the large telecom company has saved hundreds of millions Operational assessments. How much of IT (processes, applications,
in ADM. Also, the company can now rapidly respond to shifts in the and infrastructure) should be performed domestically, at an offshore
marketplace and in consumer demands, without having to worry about facility, or by a third party? What model would work most effectively
retaining and managing the proper skill sets. in the short-term? In the long term? Above and beyond cost, other
Captive/onshore elements (such as risk, taxes, labor quality, flexibility, and market growth)
need to be taken into account.
When two large insurance companies agreed to merge, their IT
organizations worked together, under the direction of the new company’s Business impact analysis. Is IT a source of competitive advantage?
CIO, to evaluate each company’s model and decide on a going-forward Could it or should it be? The proposed delivery model has to support
strategy. In one company, IT was entirely outsourced (processes, the company’s product/service/customer strategy. Also, all IT investments
applications, and infrastructure); in the other, IT was entirely captive. have to be aligned with the company’s actual or implied promises to
investors and stakeholders.
During an eight-week assessment, the team discovered that while total
operating costs would be lower with a third-party outsourcer, other A window of opportunity
strategic priorities made an in-house service delivery model. Given the During a merger or acquisition, IT is under pressure; a lot can go wrong,
criticality of rapidly executing the integration of the two companies’ but a lot can also go right. The choice of a service delivery model can
portfolio of services, the CIO decided to keep the IT services in-house. have enormous consequences, not just on Day One but for months
Management felt that the risks associated with integrating all the and years beyond. An M&A event is a rare opportunity for a “do-over”
systems while, at the same time trying to outsource the combined IT — when the CIO organizes and leads the effort to redesign the IT
operations, were too significant and outweighed the savings associated service delivery model, the business benefits can make all the difference
with a third-party outsourcer. between a merger’s financial success or failure.
Hybrid (captive + outsourced)
Notes
Two telecommunications companies merged with the expectation of 1
The service delivery model is only one way IT delivers synergies — albeit a very important way. For more
substantial synergies through the renegotiation of several IT outsourcing insights about achieving synergy, look at “Ignorance is not bliss: IT due diligence is fundamental for
contacts. The merger team conducted an eight-week assessment of the post-merger synergy,” another paper in this IT Compendium Series.
two IT organizations and decided that some functions — those with 2
It’s worth mentioning that an offshore facility can move beyond the “cost reduction” play. For
immature processes — should move back in-house, while others should be example, in financial services, we have seen offshore sites that are large (thousands of employees)
revenue-generating operations.
outsourced (the choice of provider would depend on how two incumbents
responded to a new bid.) 3
This is a good argument in favor of asking an objective, independent third party to manage the
assessment process — a third party that can enforce neutrality and bridge the gap between various
The results of the analysis pointed to more than $200 million in potential points of view and invested interests.
group was attached to its own model — the process itself united them
in finding the most effective approach model for the new business.
19
Wired for winning?
20
M&A IT — The IT landscape
Elements of
Governance, Risk and
management Revenue growth Cost reduction Asset efficiency
Compliance (GRC)
competency
Access to all Aggregate customer and Complete, merged Data access storage
Rationalized data inventory
enterprise data product data supplier data and archival
Fit with integration Synchronized CRM and Application-neutral
Integrated SCM and ERP Integrated treasury systems
architecture SFA data approach to data
Data quality Complete accurate and Quality-metric driven, Trusted data for capital Quantitative reporting
management consistent customer data loss mitigation readiness and notification
Data security,
Certified and securely Shared-cost model with Asset classification Data masking, encryption,
transparency, and
shared data cross-business context and prioritization and versioning
auditability
Timely delivery to Customer profile for Streamlining logistics Real time inventory On-time audit and
target users frontline workers and workflows management real time disclosure
Enterprise-class Flexible, integrated High availability and
Common data foundation Effective IT expenditure
deployment master data business continuity
Source: Informatica and Deloitte Consulting LLP
Following is a set of effective practice actions to consider for putting Case study 1: Seeking a broader footprint in life science
all elements of information management to work to achieve the four
In order to increase market share while maintaining economies of
identified enterprise “value drivers.”
scale, two life-science organizations merged. Both organizations had
1. Revenue growth centralized ERP models, and the merger brought them together. Thus,
resolving redundancies was the first order of business post-merger.
Aggregate customer and product data. Bring together historical data
Planning for the integration began with a “blueprinting phase” to focus
from combined customer, product, and other relevant internal records.
on resolving overlapping portfolios, including merging two data sets
Consolidate, retire, and maintain merged data with cross-business
across financials, Research and Development (R&D), Human Resources
visibility for upsell and cross-sell.
(HR), and other key functions, followed by mapping out the ERP strategy
Synchronized CRM and SFA data. Synchronize customer, alliance, with associated infrastructure and business changes. The activities were
and other sales related data through making Customer Relationship necessary to support both the Day One integration (the day the merger
Management (CRM) and Sales Force Automation (SFA) interoperate with was legally complete) and the eventual goal of integrating all people,
the rest of enterprise applications. Expand and accelerate sales efforts by processes, and technology proceeded with the guiding principle of
proposing solutions to the issues captured in customer support and inquiry integrating data to cross-sell and upsell effectively.
logs, as well as improving sales activities with alliances and channels.
This organization felt that, once it gained the momentum in merger
Complete, accurate and consistent customer data. Measure and activities, the actual efforts were easier than had been originally anticipated.
improve the completeness, accuracy, and consistency of customer data. The following factors contributed to the effectiveness of the merger:
Create targeted offerings, segment customer data, and its associated
• Refocusing the IT activities on revenue growth and involving the
product data, to understand purchasing trends. Focus on the customer
IT organization early in the process better positioned the company
segments with higher share of wallet.
to plan, manage, and deliver the changes necessary for M&A.
Certified and securely shared data. Use certified data for booking Connecting the dots from top-level imperatives to implementation
analysis, forecasting, and budgeting across applications. Merge through the use of relevant data kept the team focused on meeting
Enterprise Resource Planning (ERP) systems and make relevant data the objectives.
available for segment-specific and cross-divisional analysis. Validate • The company masked some elements of data for two reasons: to
revenue calculations by data lineage analysis across multiple databases, focus on the activities relevant for revenue growth through the
reporting, and application systems through the use of metadata. use of selected portions of data, and to maintain data privacy. The
Customer profile for frontline workers. Avoid losing focus on data masking solutions to obfuscate the data were used during the
maintaining customer loyalty and business momentum during the exchange of information across multiple divisions. This data masking
transaction and post-merger period. Empower the customer support approach made the data mining process of gaining insights on
and sales force with deep analytics real time. the divisional sales data, as well as the cross-divisional trend, more
efficient because it enabled the team to examine the selected data
Flexible, integrated master data. Develop a single, trusted version of segments germane to the growth objective.
“the truth” about organizational data through integrating master data
with business processes. Deliver context-rich reference data to manage • Data cleansing and matching solutions were employed to standardize
opportunities and pricing with expanded alliance and distribution networks. and merge the millions of transaction line items of combined product
data. Data analytics solutions were used to query and join highly
customized, product data into a standardized format.
• Adopting loosely coupled, modular information architecture helped
limit dependencies and expedited application and data consolidation.
21
Wired for winning?
22
M&A IT — The IT landscape
High availability and business continuity. Architect a solution to 2. Secure access to information
maintain high availability and disaster recovery for the high volume of
Accessing information in any format over a multiyear period is not
data post-integration. Prepare for contingencies with systems that can
an easy task for any organization. But in many cases, valuation and
be co-located across regions and business units.
assessment of merger synergies require that an organization have a
Case study 3: Preparing for a high-tech merger fairly complete picture of customers, products, services, distributions,
and other key functions. The organization also must acquire this data in
Executing a transaction can be tricky when two large companies merge a secure, compliant fashion. This grasp of organizational health based
to create a new entity. In this scenario, a merger of two high-tech on supporting data is vital to the financial success of MAD.
leaders was proposed. There was increased judicial scrutiny to verify
that the new, merged entity did not end up becoming a monopoly and 3. Make data quality as part of key measures
violate the anti-trust act. The process was highly regulated. The M&A
Many organizations are adopting a metric-driven approach to monitor
team had to produce the required reports for the judicial committee
data quality. Data quality management is used to help track the progress
from information with strict access restrictions. At the same time,
of mergers and detects issues before they become too difficult to
the team was tasked with continuing to examine and rationalize the
resolve. The quality management should also involve an investment
business synergy after the merger. Despite the delay caused by the
in establishing an IT architecture that delivers consistently high-quality
regulatory proceedings, the project was effectively completed because
information from points of entry to destination.
of the following key factors:
4. Establish an extensible environment for information management
• Subject matter specialists in information management took the leadership
role in tackling the ongoing challenge of accessing and consolidating Speed is paramount to MAD projects. Timely decision-making requires
reliable data. timely data. Having the organization-wide infrastructure for delivering
• The team used frameworks and tools for go-to-market strategy and the required information promptly is fundamental to making the right
implementation around customer and product data that helped decisions at the right time. To address the cross-functional nature of
manage risks and duplicative work. MAD, the environment in which an information exchange would occur
must be extensible and have the proper access control to deliver the
• A certified repository of data with cleansing and transformation
necessary information to the right functional owners.
capabilities was built and shared in a controlled fashion.
5. Leverage information to keep team focused and aligned
• The team created new common-definition and business rules for
critical functions, such as revenue recognition, budgeting, and Critical IT personnel possess the knowledge and experience needed
forecasting, accelerated the due diligence process. for the integration or divestiture, as well as for keeping the business
Conclusions running. The loss of key personnel can slow the integration or
divestiture process, causing missed deadlines and unrealized synergies.
In light of recent market trends across most industries, a CIO is likely to be During the uncertain times, measuring and sharing the results of MAD
involved in MAD activities more frequently than ever over the next few years. efforts based on the reliable, accurate information would help maintain
A forward-thinking CIO must come to the executive table well-prepared to the employee productivity and morale. For instance, informal rewards
contribute to business innovation and the financial bottom line. CIOs are and recognition-based “measurable” achievements are often used as a
uniquely qualified to correct potential misconceptions of IT and educate means to reinforce the positive behaviors and keep the teams aligned
executive staff on how their respective organizations should most effectively throughout MAD.
invest in information management to achieve excellent business results. The
following five guidelines should be considered while charting a course for In summary, MAD deals are complex, and effectively tackling them is
effective MAD-related activities: more art than science. However, in this MAD world, there is a way to
deal with insanity. Having engaged in blueprinting, strategic design,
1. Get IT involved early in the cross-functional team and formalized monitoring of integration implementation through
information management, many organizations have been effective in
Gartner notes that, on average, CIOs meet fewer than five times a year with
delivering the intended value from MAD. Furthermore, these companies
CEOs. Frequent, ongoing communication between the CEO and CIO on
have positioned themselves for increased agility and competitive
strategic issues helps achieve and maintain business-IT alignment. If they’re
advantage in the long term.
involved early in the process, IT executives can help target selection and
due diligence and uncover potential issues, high-cost items, and additional
Notes
synergies. Through upfront involvement, IT can drive significant value during
1
an M&A deal. Mack, Robert, “IT Handbook on Mergers, Acquisitions and Divestitures,” Gartner Inc., G00130975,
December 16, 2005.
2
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte, February 2000.
3
Raskino, Mark and Mahoney, John, “CIO Priority Resolutions for 2006,” Gartner Inc., G00136797,
December 13, 2005.
23
Wired for winning?
A lot to consider
Information technology (IT) is a critical component in achieving an Furthermore, international M&A transactions are likely to be
M&A strategy; without effective IT risk management, the value of the much more complex than domestic transactions. In international
deal could be threatened or even eroded. IT risk management is a transactions, companies must not only consider the regulatory
multidisciplinary undertaking and covers a variety of functional domains compliance concerns noted above, they must also take into account
— ranging from data protection to change management. (See “Common the potential risks to corporate risk governance, employee data rights,
IT risk management areas” below.) It is also a multifaceted and complex customer data expectations, cross-border data flow, as well as the risk
undertaking that also entails consideration of a wide array of compliance and compliance culture of the home countries of all entities involved in
requirements. As such, in a business environment with increasing the M&A transaction. Failure to adequately address these factors could
emphasis on regulatory compliance, the role of IT risk management scuttle the transaction.
becomes more important as an enabler of the M&A strategy.
In this complex risk environment, it is clear that IT risk management
Often, many organizations need to demonstrate compliance with several must be effectively implemented to effectively address the myriad legal,
overlapping requirements. A large financial company may need to meet regulatory, contract, and compliance requirements; otherwise, IT risk
Sarbanes-Oxley Act (SOX), Gramm-Leach-Bliley Act (GLBA), Payment issues left unaddressed could fundamentally affect the overall M&A
Card Industry Data Security Standard (PCI), Health Insurance Portability strategy and desired value creation.
and Accountability Act (HIPAA), and other mandates, such as those
from the Federal Financial Institutions Examination Council, Office of the
Comptroller of the Currency, and Federal Trade Commission (FTC), a global Requirements all over the map
transportation company may need to meet SOX, HIPAA, PCI, FTC, and An organization’s compliance requirements are usually determined
European Union and Asia-Pacific Economic Cooperation data protection by the industry in which it operates or its geographic operating
requirements. The effort to meet these regulations often further complicates locations. For example, health industry-related organizations
the efforts required to identify an approach and develop a strategy to normally need to meet HIPAA regulations, financial organizations
mitigate risks when consolidating or separating companies. are required to meet the requirements of GLBA, and organizations
issuing, processing, or using credit cards must meet the PCI
Data Security Standard. U.S. public companies must meet the
Common IT risk management areas provisions of SOX, and companies operating in foreign countries
• Architecture • Privacy and data protection must meet the local jurisdiction requirements that address a wide
array of requirements from privacy and data protection to system
• Asset management • Project management access management and availability.
• Business continuity management • Physical and environmental
• Change management • Problem management
Is the loss of business value real?
• Contracting and outsourcing • Operations
• IT financial control • Records management Based on Deloitte’s experience with M&A transactions, when IT risks,
especially those risks that are compliance-driven, are not fully addressed,
• IT human resources • Technology licensing
they can completely undermine the expected value creation of an M&A
• Information security transaction. Generally, IT risk tends to impact M&A deal value in four
primary areas: IT cost, earnings before interest, taxes, deprecation, and
amortization (EBITDA), technology, and regulatory and governance.
Although many of these regulations address similar requirements, such
as data protection, access controls, transaction auditing, data availability
and system monitoring; compliance with one set of regulations does not
necessarily translate into compliance with another. The specifics of each
set of regulations must be carefully evaluated.
24
M&A IT — The IT landscape
25
Wired for winning?
licensing and integration issues. Generally, this assessment will consider: The risk quantification translates identified IT risks into financial impact
statements and helps prioritize them for consideration in the final M&A
• Technology software and infrastructure vulnerabilities that may affect
transaction decision.
service levels
• Capacity and scalability of key systems to satisfy business requirements Today’s risk and compliance environment compels organizations that
are developing M&A strategies to integrate IT risk management into
• System backup and power issues that may cause business disruptions their M&A planning and implementation processes. Left unaddressed,
• Unsupported systems and code IT risk issues can fundamentally affect the overall M&A strategy and
• Vendor-owned source code that is not available for changes desired value creation. A properly structured IT risk management
framework and readiness diagnostic can provide practical insights
• Vendor service-level adequacy into the information and technology risk issues. Including IT risk
• Nonfavorable clauses in vendor agreements that would be affected by management from the outset can make the M&A picture complete,
change in ownership rather than an unfinished puzzle.
• Termination of key employees
• Loss of quality resources required for integration efforts
• Legal rights to existing key applications
• Source code that is not in escrow
• Hidden liabilities in licenses and support contracts
The information assessment considers sensitive data-handling
requirements and how well data is protected. Generally, this assessment
will consider:
• Systems and data accessible by unauthorized users and how
unauthorized access to such data can affect the company’s brand
and reputation
• Authorization, development, and approval processes for the
records program
• Privacy, intellectual property, and other sensitive information
collection, usage, storage and complaints-handling processes
• Third-party contractual arrangement adequacy for addressing sensitive
information handling
The business assessment considers technology strategy alignment
with the business, business process control integrity and automation,
and governance and compliance matters. Generally, this assessment
will consider:
• IT strategy that is not aligned with the current and future business
requirements
• Current systems that are not suitable for business requirements
• Inefficient manual work-around procedures that are required to
operate the business
• Level of system automation that does not match the level disclosed
by management
• Recently integrated business systems that have internal control
integrity issues
• Internal controls and SOX 404 issues that will impact
regulatory compliance
• Insufficient governance of IT system projects that could result in
hidden future IT costs or write-down of IT assets due to inappropriate
system development
26
M&A IT — The IT landscape
Built to last
Using an M&A event to build sustainable IT business value
By Indira Gillingham
An IT roadmap should contain both short-term and long-term strategies. • Are applications helping pave the way for business innovation?
Initiatives in the short-term are more tactical in nature and should help • Are there strategic opportunities that are being missed due to
to alleviate pain points the business faces immediately (low-hanging limitations in application capabilities?
fruit); the long-term strategy should address transformation-type
projects. Finalization of the roadmap should also include the process by • Is the architecture meeting the current needs of the business? If not,
which the roadmap document will be maintained. For instance, periodic what are the pain points?
refreshes to the roadmap as well as generational updates (i.e., version • How flexible is the current application architecture?
1.0 to version 2.0, etc). • How pervasive is the amount of old architecture in the current
3. Deliver results environment?
Nothing succeeds like financial success. IT should focus on forward- • Are there obsolete applications currently in use?
thinking solutions that address business issues — solutions that center • Are there high-maintenance/high-support costs associated with the
on operational improvements to provide high or higher quality of service current architecture environment?
and then follow through by delivering with excellence. • Is the current cost structure reasonable for our business needs?
4. Communicate early and often with the business • Do the current data management strategies meet the business goals?
A partnership between IT and the business should not be a once-a-year • Are there any existing business processes that can be automated?
event when it comes time to discuss budgets and projects. Rather, the • Are there any overlaps across business units and/or geographies?
business and IT should be proactively engaged on an ongoing basis.
Communication should be targeted and specific to provide transparency The business case for rationalizing technology stems from the potential
to IT results by publishing the metrics defined during the strategy for improved performance, reduced costs, or both. Savings from a
definition and to assess project health continuously. In addition, IT simplified footprint can be reinvested to improve quality and efficiency
needs to engage in periodic meetings to discuss innovative solutions to and/or to respond to new business needs. Rationalizing technology can
ongoing or emerging business challenges. include consolidating or outsourcing data centers (reducing operating and
maintenance costs), standardizing applications, eliminating redundancy,
Rationalizing technology: Too much or not enough? moving toward newer technology, retiring old technology, or offshoring
As companies evolve, so must their respective IT organizations. Over some operations (low-cost locations and fewer sites). The CIO should also
time, mergers and/or organic growth can create an out-of-balance evaluate options such as software-as-a-service (SaaS) or a service-oriented
IT portfolio (e.g., redundant applications or multiple data centers). architecture (SOA) as a way to achieve more flexibility and agility.
The M&A event is an opportunity to help bring balance back to the Finally, going green can contribute to sustainability by creating an IT
IT portfolio by evaluating and rationalizing both IT applications and infrastructure that accommodates emerging technologies while being
infrastructure. more energy-efficient. Green IT focuses on leveraging resources and
As an example, applications may have evolved without consideration of reducing power usage. For example, blade-server technology reduces
compliance to enterprise architecture guidelines (due typically to loosely space, cabling, power, and HVAC requirements, as well as making
defined standards and/or lack of standards enforcement). The result possible simpler administration and flexibility with the configuration.
can be an unnecessarily large and complex application footprint that’s Retaining knowledge workers: Where’s the adaptable talent?
difficult to modify. During a merger or acquisition — and perhaps most
particularly, during a divestiture — the CIO might legitimately ask, “Do Often, the synergy gained through a merger or acquisition comes from
we really need all these applications?” Or “Let’s look at ways to reduce combining two companies’ support functions into one. When two IT
costs and invest back into supporting new business operations.” organizations converge, there is usually an increased focus on reducing
cost through consolidation, including human resources. The challenge
Similarly, earlier mergers or acquisitions might have increased the for the CIO is who and how? CIOs need to assess the skill sets of their
number of data centers and, with that, the associated infrastructure, people in an entirely new light, not necessarily as an infrastructure
such as hardware, storage, and physical space. In some instances, the specialist or development lead, but place more emphasis on identifying
existence of underground data centers, in the form of a smaller data those individuals with adaptable skills. The Gartner Group calls this class
closet and equipment rooms, creates additional complexity. Not only of individuals as “versatilists” — employees who know to get things
are they not standardized in terms of security, support, reliability, and done, who can wear many hats, and who can adapt to changes in the
cost, but they usually do not follow the same rigorous protocols and business and in the IT organization. These able and agile employees
processes. In fact, these are typically managed and operated outside need to be identified, retained, and supported to help deliver on the
of the central process and with varying levels of sponsorship resulting new vision and direction of the IT organization.1
in inconsistent level of support and inability to meet agreed-to service
levels. During a merger or acquisition, the CIO should determine: “Is Focus on the long-term
there an opportunity to consolidate? How can I leverage emerging
Delivering on Day One plans is essential to the financial success of an M&A
technology to improve data center operations?”
transaction. However, CIOs should look to see beyond Day One by using the
Working with the business, IT can develop guidelines and metrics for the M&A event as an opportunity to build an IT organization for the long term.
rationalization effort. For instance, IT can participate in redefining those
processes it needs to support and then recommend the most appropriate Notes
application and infrastructure for enablement. To facilitate these sessions, 1
“Gartner’s top predictions for 2006 and beyond,” The Gartner Group, November 28, 2005.
IT can come prepared to ask several key questions, such as the following:
• Are application/IT investments aligned with where the business is heading?
• How responsive are the applications to the changing business
environment? What is the cost of change?
28
M&A IT — The IT landscape
29
M&A IT – Synergy capture
Everyone wants it, yet so few companies achieve it. More revenue, less cost — at
their most fundamental, all deals are about synergy. We know, because we have
helped hundreds of companies in their efforts to realize more value, faster, from
Our findings were consistent with this hypothesis. Our survey results These differing agendas are the dominant drivers of post-merger
suggest that while IT typically has limited impact on the valuation of the integration focus, complexity and intensity. The more synergies the
deal, early involvement of IT in due diligence is critical to the effective companies seek, the more complex the post-merger integration will be.
identification of synergies and the effectiveness of subsequent post- Companies who set a high level of ambition/expectation for post-merger
merger planning and execution. synergy must place significant focus on external stakeholder management
and integration management as the merger or acquisition progresses.
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 Whatever the strategy chosen, there are critical success factors that will
with anecdotal evidence, the hypothesis is compelling. The available help improve the odds of achieving the expected benefits. They are:
evidence points to a straightforward approach to M&A deals that will • The business must be accountable for setting the IT integration strategy
significantly improve the odds of achieving the expected benefits.
• Make the integration strategy explicit — consolidation, transformation,
Getting it right combination, or preservation; each has specific critical success factors
This straightforward approach starts with the recognition that IT and risks
activities must be closely aligned with business activities during the M&A • Set realistic targets and concrete performance measures for meeting
process. As we highlighted above, there are four dimensions to an M&A the targets, as well as consequences for not meeting them
transaction:
Due diligence
• Strategy
No matter the merger agenda, due diligence is not an optional process.
• Due diligence Performing due diligence, especially with regard to information systems
• Post-merger IT integration planning compatibility and integration issues, is absolutely critical. When correctly
• Execution performed, due diligence can help identify risks and opportunities.
The risks include sources of instability requiring immediate action.
These dimensions apply to IT as well as business activities. How well Opportunities to reduce costs, leverage resources or assets in new areas,
companies navigate each of these dimensions during the M&A process and to improve IT effectiveness and increase business flexibility can be
— especially as they apply to IT integration — will play a large part identified and pursued.
in determining whether or not the merger or acquisition ultimately
achieves the expected benefits. Moreover, during the due diligence process, decisions or actions that
will be needed before there is any significant progress on the merger or
Strategy acquisition can be identified. Expectations can also be set. For example,
order-of-magnitude estimates of expected costs and anticipated benefits
Companies vary, of course, in their motivations to pursue M&A deals.
can be developed, and resources and time frames required to address risks
Some are pioneers. The reasoning for the merger is to combine two
and issues and to capitalize on opportunities can be identified. Finally, due
(or more) entities to create a better future. These companies are most
diligence should confirm how much (or how little) compatibility there is
likely to have the desire to seek out synergies as their main motivation
between IT architectures and assets of the merging entities.
for the combination. Others are talent scouts. Often in this scenario, the
acquiring, or larger entity, wants to acquire knowledge or capabilities
that it doesn’t have. These companies also desire to create synergies
with the combination. Then there are the consolidators. These
companies mainly seek 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 growth — in
revenue and in size.
32
M&A IT — Synergy capture
As with the process of setting the strategy, there are critical success Key questions to ask when choosing a model include:
factors in performing due diligence that will help improve the odds of • What are the main business objectives of the merger or acquisition,
achieving the expected benefits. They are: e.g., growth, market positioning, or cost savings?
• Form an IT integration team early in the due diligence process • What key benefits are expected from the transaction?
• Get the right people on the team — both internally and externally. • What approach to business integration is required to realize these benefits?
These people should have cross-functional knowledge and experience
and be able to see the big picture going forward • What approach to IT integration is required to realize these benefits?
• Set a broad due diligence scope — from assessing the IT environment • In what ways can IT help the business realize its goals for the transaction?
to assessing risk and identifying potential synergies • What opportunities exist to use technology to position the business
• Set the baseline — the knowledge base that must be in place to move for future growth and change?
forward with the M&A process For each model, the critical success factors, as well as the causes of
The bottom line is that IT due diligence should result in a high-level action potential failure, are strikingly different. Figure 3 depicts some of these
plan to mitigate identified risks, resolve key issues, and capitalize on major critical success factors and potential causes of failure.
opportunities. In addition to critical success factors for each integration model, there
Post-merger integration planning — the model makes the difference are critical success factors for the overall integration that will help
improve the odds of achieving the expected benefits. They are:
Once due diligence is finished, the results can be used to push forward
• Close integration between the IT integration planning and business
with post-merger integration planning. When two companies merge,
process and organization planning
or when one acquires the other, there are a myriad of scenarios in
which the combination can occur. In general, there are four “models” • Appoint a full-time project manager under an IT integration project
or approaches that can be applied to post-merger integration of most management office (PMO) linked to a company-wide PMO
M&A transactions. • Decide the future state of the IT organization, processes, and architecture
They are: • Create specific project plans based on which integration strategy is chosen
• Consolidation — Calls for the rapid and efficient conversion of one • Create and maintain a broad communication plan that keeps everyone
company to the strategy, structure, processes and systems of the in the loop
acquiring company
Execution
• Combination — Means selecting the most effective processes,
structures and systems from each company to form an efficient Each of the four post-merger IT integration approaches has associated
operating model for the new entity execution priorities and management issues that must be addressed. The
execution priorities focus on process and technology integration. The
• Transformation — Entails synthesizing disparate organizational and management issues include leadership and cultural blending challenges.
technology pieces into a new whole
• Preservation — Supports individual companies or business units in For example, with a consolidation approach to IT integration, the focus
retaining their individual capabilities and cultures is on risk management for process issues and on data conversion for
technology issues. With a combination approach, the process focus is on
The approach a company chooses is dependent on its goals for the systems evaluation, and the technology focus is on systems integration.
new entity. More specifically, M&A business objectives usually reflect With a transformation approach, the process emphasis is on innovation;
the acquiring company’s acquisition profile and business agenda, as the technology emphasis is on the overall IT architecture. Finally, with a
discussed in the “Strategy” section above. preservation approach, stakeholder management is the focal point of
process issues, while communication between business units is key for
Figure 2 depicts how the adopted integration approach should match
technology concerns.
the business objectives and acquisition profile.
33
Wired for winning?
Causes of failure • Sqandering exploitable • Long, drawn-out • Organizational resistance • Excessive inefficiency
assets assessment exercises to change • Unnecessary duplication
• Alienating key people • Unresolved issues • Unrealistic goals • Missed cost and
• Overlooking possible • Inefficient/complex • Failing to balance operational synergies
synergies patchwork of systems long-term benefits
Source: Deloitte Consulting LLP
Management issues can be challenging, even in the smoothest of a challenge is how to plan for and execute the post-merger IT systems
M&A transactions. The blending of organizations and cultures is not integration. Consequently, proper selection and execution of a post-close
easy because no matter the industry, no two companies evolve in quite IT integration plan in a timely manner can help achieve any anticipated
the same manner. Each will each have different leadership styles and synergies from the M&A transaction. Our experience indicates that the
cultures. To facilitate the transition to the newly merged entity, each better the post-close planning and execution, the better to overall merger
post-merger IT integration approach will have to deal with different results, and that a key attribute to effective post-close integration is a high
management and cultural issues. level of integration between IT and the business.
For example, the typical leadership style in a consolidation approach to To achieve this, effective IT due diligence and speed of integration are
IT integration is an authoritarian approach that imposes the will of the critical. Any post-merger integration approach chosen should be guided
acquiring company onto the company being acquired. The culture of by the M&A business objectives, and the selected approach (consolidation,
the acquiring company is also imposed (as much as possible) on the new combination, transformation, or preservation) should match the business
entity. In a combination approach, the leadership is more collegial and objectives and acquisition profile. Each of these approaches has its
there is a knitting together of corporate cultures. In a transformation individual characteristics, success factors, and potential causes of failure
approach, there is often inspirational leadership that seeks out new and should be selected with a full understanding of which approach most
ideas and synergies more than with any of the other approaches. There effectively fits the particular M&A transaction and which would work
is often a new corporate culture that is sculpted from select parts of well with the IT integration issues uncovered in the due diligence process.
the prior cultures. With a preservation approach, the leadership style is Each approach should be executed in a timely manner to realize the
most effectively described as respectful, with leaders of both companies expected value from the transaction and benefits should be tracked and
retaining autonomy and with the cultures of both companies remaining championed throughout the new organization to promote acceptance of
largely unchanged. transition to the new culture.
Why all the discussion about leadership styles and process issues? To improve the odds of achieving the expected benefits, it is very
Because these issues directly affect how smoothly (or not) the post- important to consider the four “pillars” of M&A:
merger IT integration will proceed. • Set the strategy — develop and carry out the IT and business
As with the other three dimensions of post-merger success, there are integration strategies in parallel
critical success factors for the execution of IT integration that will help • Don’t skip on the due diligence — form an IT integration team early
improve the odds of achieving the expected benefits. They are: on and cast a broad net to identify potential issues and roadblocks
• Execute the post-merger integration in a timely manner; the longer it to success
takes, the lower the realized value from the transaction • Plan the post-merger IT integration — closely align IT integration
• Develop, track and report on project performance metrics planning and execution with business planning and execution
• Measure and publish realized benefits, which will establish goodwill in • Execute the post-close IT integration speedily — execute fast and
the newly merged entity going forward nimbly; the longer it takes, the lower the realized value
Wrapping it up Following this path won’t ensure that the expected benefits are achieved
— nothing is guaranteed. However, proper planning and execution
The M&A transaction process is not easy. It is fraught with pitfalls and of post-merger IT integration can make the process easier and more
roadblocks to achieving the expected benefits that must be carefully effective to increase the likelihood of achieving the expected benefits in
navigated and overcome with skill and care to achieve the goal of one the long run. That’s a win-win deal.
new, (hopefully) improved organization from two separate, distinctly
different companies. While there are many hurdles that must be Notes
surmounted in any M&A transaction, the one that most frequently poses 1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.
2
Merriam Webster’s Online Dictionary. http://www.m-w.com/dictionary/synergy.
34
M&A IT — Synergy capture
Before and after M&A, a CIO is challenged to find economies of scale • Restructure operations
Decrease • Streamline supply chain
— yes — but also to identify other opportunities to help the business
compete more efficiently and effectively. Business Business Avoid • Increase economies of scale
value costs* • Maintain regulatory compliance
Delay • Apply cash management practices
• Use options to postpone purchases
Surprise! IT delivers cost synergies beyond economies of scale
Business risk Reduce • Strengthen security
The new IT organization in a post-merger high-tech company was • Identify delinquent accounts early
tasked to reduce IT expenditures for software and hardware by
$10 million annually — an aggressive target of 30 percent of the • Real-time information exchange
Business with partners
Enhance
budget — by leveraging economies of scale in purchasing. But IT capabilities • Automatic tracking of inventory
leaders soon realized that only 40 percent of its spending would
be with the same vendors. Was there a way to achieve synergy *Costs include operating costs as well as the cost of capital
by rationalizing architectures and streamlining service levels? In
the end, only 15 percent of the total cost synergies came from Source: Deloitte Consulting LLP
procurement, while 60 percent came from eliminating products
and, most interesting, 25 percent came from updating purchasing The possibilities for IT-enabled business value fall into four categories:
and maintenance standards — a result that could have been
achieved even without the merger! How do IT expenditures produce business value? Through the IT
value chain: IT spend is transformed into IT resources; IT resources
After the merger of two insurance companies, the annual IT budget are transformed into IT outputs; and IT outputs are transformed to
would be nearly $1 billion. Yet a delay in the deal closure forced business value (Figure 2). The IT value chain reveals three levers of IT-
each IT department to look for savings within its own organization. enabled business value: resource management, work management, and
One cut expenditures 10 percent by renegotiating contracts, business-IT alignment (Figure 3).
modifying an inefficient services, and reducing project spend even
prior to any economies of scale resulting from the merger.
35
Wired for winning?
Figure 2: The “IT value chain” Recent data suggests an average spend overlap of only 40 percent.1
Even for nominally interchangeable products, such as desktop
computers and low-end servers, existing leases and maintenance
contracts usually require a runoff of current contracts before savings
can be realized. Furthermore, given a maturing technology industry,
decreasing supplier margins, and (for most companies) already heavily
discounted unit costs, the opportunity to achieve savings purely by
IT cost IT resources IT output Business value economy of scale has diminished. Today, economies-of-scale opportunity
• Steady state funds • Productive • Information • Business revenues exists primarily when a small company is acquired by a much larger one.
• Project funds staff hours • Automation enhanced
• Computer • Business costs
Yet, there is usually a short-term opportunity in the avoidance of capital
• Operating budget • Coordination
hardware reduced spend. One large health care company was able to reduce capital
• Capital • Connection
authorizations • Software • Asset efficiency expenditures on hardware and software to virtually nothing for one year
• Discretionary
packages improved by redeploying surplus PC assets and rationalizing application licenses.
expenditures • Telecommun- • Business risk Also, the related internal overhead costs of obtaining the inputs can
ication services reduced usually be reduced. In a merger, the IT organization has the opportunity
• Nondiscretionary
expenditures • Office supplies
to combine IT purchasing or staffing functions, helping to eliminate any
• Etc. • Etc.
duplication and further improve resource management.
Source: Deloitte Consulting LLP Work management
The effectiveness of transforming IT resources into IT outputs is
Figure 3: IT value chain and IT business value drivers measured by the amount of resources required to put in place, operate,
and support delivered IT capabilities. The ratio of inputs to outputs can
IT cost IT resources IT output Business value
be improved, for example, by solving more user problems per hour,
delivering functionality with less rework, or operating systems with
fewer servers. Pulling this lever includes streamlining the workflow
within the IT organization, training and motivating employees, and
rationalizing architectures.
IT IT Business
Business For mergers in transaction-based industries, such as financial services
IT-enabled value resources output value
or physical distribution, IT may be able to deliver the combined service
business = = X X
value volumes of the new enterprise from the infrastructure of just one of
IT cost IT cost IT IT
resources output
the original companies. In the acquisition of a travel service company,
for example, the buying company was fully able to subsume the
target’s customer operations into its own infrastructure, effectively
increasing revenue while holding costs steady, leading to immediate
IT resource IT work Business and profit improvements.
management management IT alignment
A merger also gives the IT organization the opportunity to cross-
Relative impact on IT-
enabled business value 15% 35% 50% fertilize, to apply the practices from the most efficient and effective
organization, and to stimulate innovation in IT practices and tools.
Source: Deloitte Consulting LLP Moreover, the expected disruption caused by the merger can facilitate
the implementation of changes that would have been resisted in a more
stable environment.
To capture the full potential of an M&A opportunity, CIOs must Business-IT alignment
understand and make use of all three of these mutually exclusive
and collectively exhaustive drivers of IT business value. When pulled The transformation of IT outputs to business results is measured by the
effectively (together or separately), these levers can substantially improve use of IT outputs to achieve revenue growth or profit improvement. The
the overall ratio of IT expenditures to IT-enabled business results. business-IT alignment lever can be pulled by increasing the business use
of existing capabilities or by discontinuing low-value IT deliverables.
Here are practical suggestions to consider for pulling each lever in an
M&A context: In a merger, many business functions will be combined: For example,
the new organization may not need two sales forces, two warehouse
Resource management managers, two HR departments, and two accounting departments.
In acquiring resources, is IT spending efficiently? Resource management When one of the two is eliminated, its IT systems usually are also. In
(the ratio of resources acquired divided by dollars spent) can be addition, the merger itself may lead to the discontinuance of some
improved two ways: Buy more for the same money, or buy as much for operations and their IT support.
less. For example, the resource management lever can include reducing A merger provides an opportunity for IT to re-evaluate the service
overhead in contractor services or negotiating a greater discount based levels provided to the business. IT may be able to fine-tune its outputs
on purchase volume. without adversely impacting business performance by delivering services
This is the primary area for economies of scale. By aggregating the selectively — say, only to engineering or only to administrative services
purchasing power of the two merging organizations, IT can increase — based on need rather than company-wide.
negotiation leverage, positioning the combined organization to be able Finally, and perhaps most importantly, the energy and expectations
to obtain more favorable commercial terms from its suppliers. brought about by a merger can give the CIO the opportunity to engage
These savings, however, can be severely constrained by differences in business leaders in strategic discussions aimed at improving business
the two companies’ application architectures and hardware standards. results from the use of existing or proposed capabilities.
36
M&A IT — Synergy capture
37
Wired for winning?
Introduction Including IT in pre-close due diligence can enable the early identification
of potential synergies from the M&A transaction, empower business
Mergers and Acquisitions (M&A) is all about synergy capture — whether
executives to take advantage of the important role IT plays in realizing
cost savings or strategy enablement (or both). The role of Information
M&A synergies, and support the collaboration of business leadership
Technology (IT) in achieving cost savings is usually a given (rightly or
and IT in determining an effective integration strategy.
wrongly). But IT also can be instrumental in achieving strategic synergy
capture, which might take the shape of developing and delivering Without IT due diligence, certain risks — such as integration barriers,
innovative products, or establishing a distinguishing competitive long lead times, deal-breaking costs, and contract noncompliance
advantage, or solidifying a dominant position in a discrete market, or — are not likely to be identified. In the same study, we found that
expanding and growing in market share or geography. poor due diligence can cause integration costs to balloon by as much
as two to three times the annual IT budget. To cite just one reason,
Of course, where there’s opportunity, there’s risk. Given the importance
the costs surrounding relicensing or the transfer of existing licenses
of achieving synergy capture to make a deal worthwhile, it’s surprising
can end up being as much as 50 percent of the product list price — a
that pre-close IT due diligence is not more common. What could be the
penalty likely to be overlooked by the deal negotiating team if there’s
explanation? Simply put, a lack of perspective. In many organizations, IT
no IT due diligence.1
is thought of as a cost center, not as a mission-critical enabling function
or even, in some cases, as a profit center. We know of one global manufacturing company that did not include IT
on the acquisition deal team, then limited IT due diligence to less than
Achieving synergy one week. Twelve months post-close, the acquired business was running
If synergy (cost savings or strategy enablement) is a desirable outcome largely on legacy, nonintegrated applications. While IT costs rose, the
of the merger or acquisition — and when would it not be? — IT due greatest penalties came from inefficient processes and redundant data.
diligence is mandatory. A recent, internal Deloitte study of 31 companies Overall, the acquisition failed to realize anticipated synergies.
that had participated in significant M&A activity over the prior 12
months suggests that 1) synergy capture correlates strongly with the
financial success of a merger and; 2) when IT is part of the due diligence
process, there is a direct correlation to the enablement of post-deal
synergies capture (Figure 1).
...And for the most part, IT involvement in DD leads to effective IT ...The extent to which IT enables synergies correlates
enablement of synergies strongly with merger success
5.0 5.0
IT enablement of synergies
2.5 2.5
0.0 0.0
0.0 2.5 5.0 0.0 2.5 5.0
IT involvement in DD IT enablement of synergies
38
M&A IT — Synergy capture
IT applications
portfolio Service portfolio IT governance IT financial
Application (planning) management
IT service
support of key performance IT strategy and IT budget planning
business planning
processes
39
Wired for winning?
40
M&A IT — Synergy capture
The expected benefits projections from some recent M&A transaction As an example, any CIO on any given day, could create a similar
announcements are staggering: $1 billion in cost savings, $100 million event (let’s call it a virtual M&A transaction). That is, they could make
in Information Technology (IT) cost reductions, $1.1 billion in combined an internal or external announcement and commitment to seize an
revenue and cost synergies, $7 billion increase in market capitalization.1 opportunity to dramatically improve business results without actually
Despite the recent credit crunch and historically high percentage of executing an M&A transaction.
failed M&A transactions, there are still companies making big bets
A review of the typical tactical activities and opportunities pursued
with high expectations for achieving going-forward benefits.2 Many of
during a real M&A transaction reveals some interesting findings:
these companies are realizing the deal promise and attaining staggering
results from M&A activities (mergers, acquisitions, and divestitures). 1. Most of the tactical M&A opportunities exist even without a real
M&A transaction.
However, while completing high-risk, high-reward M&A transactions
are not, and should not be, for everyone, we believe achieving similar 2. Because antitrust approvals and associated waiting periods do not
business results can and should be an expectation, even if no M&A deal apply to virtual transactions, many of the virtual transaction benefits
is involved. can be captured more quickly.
In recent months, the number of inquiries we have received about 3. An organization completing a virtual transaction does not have
M&A transaction results from CIOs, CFOs, governors, and various other to pay the acquisition cost or deal premium, which eliminates the
business and government leaders increased significantly. These leaders primary transaction risk while still achieving many of the benefits.
have two important characteristics in common:
4. Any executive with P&L responsibility can create a virtual M&A
1. They want to realize M&A-like benefits for their organizations. transaction and make a difference.
2. They have no intention of completing an M&A transaction. A review of the project objectives of a typical M&A deal listed below
begins to illustrate how an executive at any organization could create a
The specific reasons these leaders are asking M&A-related questions
virtual M&A event and improve financial and operational performance
vary widely, ranging from a governor’s need to fund overdue and
without executing a deal.
desperately needed public infrastructure repairs (e.g., roadways, bridges,
and tunnels) by decreasing IT costs, to a CIO’s need to reduce costs by
consolidating multiple division IT organizations into one central shared
IT function, to a government leader’s desire to prevent tax increases by Typical M&A project objectives
eliminating duplicate and redundant agency IT functions.
1. Realize the deal promise, and meet or exceed the deal premium.
The critical questions these leaders are really asking are: Can organizations
leverage the approaches, learnings, and tactics from M&A transactions 2. Reinvent and redefine the competitive landscape.
to realize similar benefits without taking the risk of actually completing a 3. Integrate and rationalize similar operations.
deal? Can they move the needle on the top line, the bottom line, as well
as the stock price, if applicable, without calling in the investment bankers? 4. Investigate alternative delivery models.
Can a CIO make difference? The data suggests absolutely yes. 5. Capture synergies rapidly.
At its core, an M&A transaction (an acquisition, for example) is an event 6. Streamline and integrate organizations.
— a public announcement and commitment to seize an opportunity to
7. Establish clear accountability, roles, responsibilities, and reporting lines.
dramatically improve business results. The acquisition is just the vehicle,
or the catalytic “event.” 8. Simplify the business and remove unnecessary complexity.
9. Retain and deploy top talent.
10. Achieve an issue-free cutover (Day One)/transition.
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Wired for winning?
To help bring the virtual M&A event-driven IT transformation concept to 2. The deal nonnegotiables and communicated them to external parties
life, consider a few recent examples: during his state-of-the-state address, similar to a Wall Street deal
announcement.
Case study 1: Ready for launch 3. Integration guiding principles. The status quo is no longer acceptable
if we are to achieve the expected deal benefits.
The burning platform
4. An aggressive integration blueprint that focused on consolidating and
Simplify the organization, remove duplication, and achieve IT cost
rationalizing the IT services of 30+ agencies providing IT-related services.
savings and efficiency
5. Clear and aggressive synergy targets based on “top down” and
Timeline
“bottom up” synergy analysis, aligned with external stakeholder
Six to eight months requirements (e.g., required infrastructure investment estimated),
which is similar to aligning goals with Wall Street analyst expectations.
Case overview
6. A compelling change management plan. Implementing change in
The CIO of a major company was faced with the integration of three the public sector often requires special attention, particularly when
related IT organizations. To gain immediate transaction, the CIO created the change involves services and spending reductions.
a virtual M&A transaction. With coaching from experienced M&A
subject matter specialists, the CIO developed:
Case study 3: Health care for all
1. A clear and compelling deal rationale, which was the mandate for
integrating the three IT organizations. The burning platform
2. The deal nonnegotiables and communicated them to external parties Remove $100 million in IT costs to reduce the cost of health care
(similar to a Wall Street deal announcement).
Timeline
3. Integration guiding principles. The status quo is no longer acceptable
12 months
if we are to achieve the expected deal benefits.
Case overview
4. Clear and aggressive synergy targets based on “top down” and
“bottom up” synergy analysis. The CIO of a major insurance provider was using the typical M&A
approach, techniques, and tools in completing the early planning for
5. A distinctly different competitive landscape with alternative delivery
an announced merger. However, the deal failed to gain the required
models. The current services delivered by the IT organization(s), and
regulatory approval to proceed. To salvage the work that had been
the delivery models used, would not necessarily be the same after
done during the planning process as well as capture a large portion of
the deal was completed.
the synergy opportunities that had been identified ($100 million in IT
6. A distinctly different IT organization model with clear leadership savings alone), the CIO turned the real M&A transaction into a virtual
changes. As with any deal, the organization and the leadership must M&A transaction. With coaching from experienced M&A subject matter
be evaluated and upgraded for the good of the continuing business. specialists, the CIO continued down the M&A path and developed:
1. A revised “deal rationale.” The mandate for capturing the identified
Case study 2: Hello there, governor savings and passing them to subscribers was still very important
regardless of whether the transaction proceeded.
The burning platform
2. A revised integration/improvement blueprint with aggressive
Streamline and rationalize overlapping state government IT operations delivery model changes. Focus shifted to driving improvement and
to significantly reduce costs and free up investment dollars to rebuild aggressively achieving efficiency and savings through alternative
state controlled highways and bridges. delivery models, such as outsourcing significant portions of IT.
Timeline 3. Clear and aggressive synergy targets based on “top down” and
12–18 months “bottom up” synergy analysis.
42
M&A IT — Synergy capture
What virtual M&A opportunities are available? The list of IT opportunities and synergy opportunities pursued and
achieved in a typical M&A deal are far-reaching and impressive.
The case examples only begin to show the power of the virtual M&A
Although the full breadth and magnitude of savings are typically not
concept. To truly understand the impact a virtual M&A transaction could
achievable with a virtual M&A transaction, the benefits can still be very
have on your organization, ask yourself: How could I leverage the M&A
significant to your organization.
improvement/synergy opportunities listed below to improve my business
in a meaningful way, even without an M&A transaction in sight? Beware: Virtual transactions are not risk free
Pursuing M&A-like opportunities is not without risk (even if there
is no underlying M&A transaction). To achieve significant benefits,
M&A improvement/synergy opportunities organizations likely need to take some operational risks. Unlike real
M&A transactions, however, an organization that pursues a virtual
IT organization transaction can set the level of risk it is willing to take and strike an
acceptable balance between risk and reward because no deal premium
• Organization consolidation
needs to be achieved.
• Organization rationalization and simplification
The keys to achieving expected results
• Resource location improvement and offshoring
The keys to achieving the expected results from a virtual M&A
transaction are much the same as those that make a true M&A
Applications
transaction work. These include:
• Application and instance consolidation
1. Strong, consistent senior management support — the mandate
• Legacy system retirement
• Web site consolidation and simplification 2. A clear and comprehensive virtual M&A strategy that aligns with the
overall corporate strategy
• Application development, maintenance, and support delivery
model refinement 3. Comprehensive preannouncement financial and operational
• Outsourcing setup, renegotiation, or termination due diligence
4. Clear revenue and cost improvement targets
Infrastructure 5. A commitment to evaluate and change every part of the business
• Data center consolidation (from top to bottom) — view every function, every process, every
product, every delivery model, every facility, every contract, every
• Network consolidation
alliance, every relationship, and every organization as an opportunity
• Server consolidation
6. An internal commitment to achieve outlined targets
• E-mail consolidation
• Data warehouse consolidation 7. An external commitment to the public, including shareholders and
Wall Street analysts
• Interface and EDI rationalization, simplification, and improvement
• IT infrastructure outsourcing setup, renegotiation, or termination 8. A clear and aggressive timeline
• Buy versus lease decision improvement 9. A structured and aggressive execution
• IT procurement contract renegotiation (hardware, software, The rewards go to those who challenge the status quo
and services)
Hollywood moviemakers regularly limit the risk and cost of new films
• IT strategic sourcing
by leveraging virtual special effects and even virtual actors in some
• Telecom bill reviews cases. The virtual technology also opens movie making to a much wider
group of players. Many of these films have achieved critical acclaim
and spectacular box office results. The same opportunities exist in the
Other business world for executives willing to move into the virtual world,
• IT project portfolio rationalization apply M&A tools and techniques to steady-state problems, and drive
• Facility consolidation and relocation step-change improvement within their organizations. Give the virtual
M&A concept some thought. Spectacular Wall Street results could
• Training credits
follow, even when no deal is in sight.
• Service level rationalization and improvement
• IT scope rationalization and improvement Notes
1
• IT demand management Deloitte Consulting analysis based on Mergerstat Data, all transactions <$500 million involving U.S.
based buyer and/or seller from January 1, 2003, to October 31, 2007.
• IT tax credits 2
Deloitte direct knowledge and client interviews.
• Rogue IT reduction/IT shared services implementation
• Consultant and contractor rationalization and renegotiation
• Legal entity structure refinement and simplification
43
M&A IT – Integration
It’s hard. Many M&A deals fail to deliver value — some even destroy
45
Wired for winning?
M&A processes and tools. Although your integration team might be 5. Curveballs. At various points in the simulation, participants are
going down this road for the first time, there’s no need to reinvent the presented with unexpected challenges similar to what they might
wheel. Why not capitalize on the successes (and failures) of others? encounter on a real integration project. This lets them experiment and
Today, there are a number of time-tested processes and tools that can gain experience in a safe environment. It can also help them understand
help integration teams complete their required tasks faster and more and appreciate the complexities of integration planning and execution.
effectively, thereby accelerating the overall integration effort. 6. Real-time coaching and lessons learned. Experienced integration
We recently helped a global manufacturing company in their efforts to practitioners provide continuous coaching and counseling
develop and institutionalize a set of detailed and repeatable processes, throughout the simulation. This can help participants learn from
tools, and accelerators that will guide all of its future M&A activity. The their mistakes and exposes them to effective practices that have
CEO had told his management team that the effective execution of a worked well for others.
number of M&A transactions over the next five years would be critical to A large chemical company recently conducted a simulation exercise to
the organization’s future financial success. Although the company had prepare its IT integration team for a series of upcoming acquisitions.
done a number of M&A deals in the past, the CEO recognized the need The simulation covered the entire integration lifecycle, from developing
to develop and improve the organization’s M&A capabilities even further. the initial integration project charter, through planning for Day One, to
As part of the project, we helped management in their efforts to defining the future state. By the end of the exercise, the vast majority of
define and develop a seven-step process for merger integrations and participants (89 percent) felt confident that they were well-prepared for
divestitures. This was followed by 22 function-specific playbooks, the M&A challenges ahead.
including two for IT: one for integration and one for divestiture. Each We have seen many real-world integration projects, where a company’s
playbook presented detailed processes that were consistent, efficient, business and IT functions were surprised by how closely they had to
and repeatable. We also helped them develop a comprehensive toolkit work together to achieve the desired outcomes. To tackle this problem,
that included company-specific and function-specific tools, templates, some companies have started using simulation techniques to help
and accelerators for effectively executing integrations and divestitures. the business and IT gain firsthand experience jointly developing a
This toolkit will enable their project teams to get out of the gate quickly blueprint for the future, identifying and capturing synergies, designing
using consistent tools and templates. It will also allow them to focus the required IT foundation, and managing a dizzying array of in-flight
their time and attention on strategy, planning, and execution — instead projects. Simulation can provide a safe environment for both sides to
of getting bogged down creating and implementing untested tools. learn what works and what doesn’t. Even more importantly, it can help
This effort is already paying big dividends. Since the project was the participants understand and appreciate their mutual dependencies.
completed, the company has effectively executed seven multibillion- This understanding is critical in the heat of a real deal; yet, it is difficult
dollar M&A transactions — a result they credit in no small measure to to convey in words. We have found the most effective way to learn it is
their investment in M&A processes and tools. through firsthand experience.
M&A experience. Experience is perhaps the most critical M&A Simulation exercises may not provide true “real deal” experiences. They
capability of all. This is especially true for IT, which is generally the most do, however, provide valuable exposure and practical experience that
expensive and time-consuming part of the integration and is also often can better position an integration team for the tasks ahead.
the key to unlocking synergy benefits across the entire business. How
can an IT organization develop this critical M&A experience without Walking the tightrope
learning everything the hard way on a series of real deals? Clearly, it takes more than just improved integration capabilities to
The solution to this dilemma is an integration simulator. After all, most make an M&A deal financially successful. There is usually little that can
people generally learn more effectively by doing. A simulator gives be done for a bad deal conducted with bad due diligence. However,
integration team leaders and team members a chance to develop “real an IT organization can do its part to help a good deal stay on track by
deal” experience in a safe environment before they find themselves in the developing and improving its M&A knowledge, processes, tools, and
crucible of a real transaction. A realistic and challenging simulation includes: experience before the integration begins. Key benefits include:
1. A realistic target company. The target company created for the • Shorter transaction lifecycle (faster deal execution, faster
simulation is often based on a real-life business to establish a high integration/divestiture)
degree of realism. • More effective capture of integration synergies and divestiture benefits
2. A realistic target company team. During the simulation, • Faster decision-making
participants interact with virtual members of the target company’s
• Reduced M&A cost structure (fewer Day One problems, less rework)
team. Every virtual team member has a unique personality, including
unique traits, strengths, weaknesses, and potential hidden agendas • Increased job satisfaction
— just like people in the real world. • Improved understanding of integration roles and responsibilities
3. Broad scope. The scope of the simulation covers all key integration Regardless of a transaction’s size or complexity, the integration team’s
activities, from initial integration strategy and scope development speed and effectiveness can have a significant impact on whether the
through Day One Go Live and synergy capture. deal is viewed as a long-term financial success or failure. If more IT
4. Training modules with real deliverables. Throughout the simulation, organizations viewed merger integration as critical to achieving the
participants are required to complete various integration activities and expected financial results and focused on developing their capabilities
produce actual deliverables. Prior to each activity, experienced M&A prior to being pulled into the process, the IT integration team might feel
practitioners deliver focused training about the activity and the related more comfortable walking the M&A tightrope when they come to it.
processes, tools, and accelerators required to complete the tasks. And maybe, just maybe, more than 40 percent of M&A deals would be
financially successful.
Notes
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.
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M&A IT — Integration
Virtual fences
Five ways to retain IT people when you need them most
The acquired company will also bring new and different infrastructure, 3. Create a short-term roadmap
technologies, operating systems and applications, geographic locations, Now that you have a broad-brush vision for IT, it’s time to create a
products, and services that will need IT support. Compile and compare roadmap to achieve your Day One goals and build your IT organization
organization information that will impact the IT skills, knowledge, and for the future. You’ll need to share your plans with the people who will
staffing required to operate your business on Day One and beyond. help fulfill your goals. Let them have a say in developing the tactics for
Keys to this step getting the job done. Also establish an incentive strategy, which may
include financial and nonfinancial rewards, to make sure you have the
Grow your friendship with Human Resources (HR). You’ll need people you need to achieve results.
their guidance and support from the start on your due diligence. HR can
provide the support you’ll need to develop and implement employee Keys to this step for reaching Day One
retention and release strategies, plan the new compensation strategy, Select an effective integration team. You’ll need an integration team with
formulate offer packages and letters to employees, and create and complete knowledge of both companies’ systems and processes to meet Day
execute communication and training plans. One targets. Select employees from both sides of the deal based on their skills
Get a head start. As much as possible, document employee and and knowledge so you’ll have a well-rounded team. Don’t underestimate the
organization baselines during the due diligence process. Determine need for the knowledge held by your newly acquired people.
which positions and people are most critical or most difficult to replace. Tell them what you know…and what you don’t know yet. You’ll
Locate potential sticking points, such as significant differences in job need to start communications as soon as the announcement is made,
requirements, salary ranges, benefit packages, and corporate culture. probably well before you have all the answers yourself. It’s okay to
With the right upfront planning, the final merger agreement can be communicate that all the decisions haven’t been made, but assure
structured to share the responsibility of achieving integration and employees that you’ll let them know as soon as you know. Don’t let the
synergy goals with the acquired company and their management team. rumor mill fill in the gaps for you.
47
Wired for winning?
Make them an offer they can’t refuse. You’ll need all hands on deck Play fair. Work with HR so that all offer packages are fair and
to achieve Day One targets. Right out of the gates, you may need to distributed simultaneously. Make sure you have a plan in place to assist
offer incentives to encourage critical IT employees to stay while you firm the management team in delivering consistent messages about the
up the long-range plans. offers. Also work with HR to provide a clear process for employees to
gain offer clarification and/or adjustments.
Look beyond financial incentives. Because good IT folks are in high
demand, your incentive strategy will probably include monetary rewards,
especially for short-term employees you’ll need during the transition.
Beyond the transition phase, nonfinancial rewards, such as stability,
leadership opportunities, broader responsibilities, and the opportunity
to work on new or different technologies are important reasons why IT
employees stay committed to the new organization. Often a balanced
strategy of financial and nonfinancial rewards works most effectively
from the employee and company perspectives.
Real-life results in the high-tech industry • Remained flexible to account for changing deadlines.
Regulatory delays caused the closing date to be postponed
The executive management of a global high-tech company wanted several times, resulting in retention renegotiations, especially
to accelerate growth and establish greater market penetration. In late with critical employees
summer, it announced its intention to acquire an out-of-state company
with comparable product lines, revenue, and employee demographics. • Designed plans for retaining long-term employees. The CIO worked
with the senior IT staff to identify IT employees who would have a
Meeting the synergy targets would require a substantial headcount long-term role with the combined company. With support from HR,
reduction after the integration work was complete. But in the interim, they created retention plans that supported the employees’ career
an all-out effort from IT employees from both organizations would be goals and the company’s synergy targets. These plans were ready
required to accomplish the integration tasks. These are the steps this for Day One rollout
company’s management followed.
Build bridges and commitment. During the integration process, the
Start with a baseline. The CIO looked to HR for support in CIO, with support from HR:
compiling employee salary and benefit information for both • Incorporated key members of the acquired company’s management
companies. Using this information, management: into the transition plans and the new organization structure. They
were instrumental in helping their coworkers assimilate into the
• Determined impacts to merger synergy targets and total
new organization and overcome cultural and other hurdles
compensation and benefits programs
• Made sure that employee offers (both short and long term) were
• Created strategies for short-term financial and nonfinancial
fair, and two-way communication lines were open for employees to
incentive plans and long-term job offers
get timely, accurate answers to their questions
• Identified key employees who were critical to operations
• Provided outplacement support for employees who were leaving
• Evaluated cultural fit between the two companies the company
Decide on the long-term IT direction. A future IT organizational Focus on meeting goals and celebrate along the way. Progress
strategy was created that supported the corporate vision and synergy toward milestones was shared with employees on a regular basis.
targets. As a result, management: Management:
• Accelerated plans for a backup data center to improve scalability; • Held Day One celebration events at all company sites to build
the target company’s out-of-state location was a good strategic fit, camaraderie. Executive road shows introduced the newly combined
plus fewer employees would need to be relocated management team to employees
• Analyzed operations for both operations to see which offered • Recognized attainment of major milestones with celebration events
the most efficient IT solutions and considered outsourcing and special recognition for those who helped make it happen.
opportunities; with all the options on the table, an adopt-and-go These events were used to set everyone’s sights on meeting the
solution of merging the target company’s operations into the parent next milestone
was confirmed as the most efficient solution
• Expanded the CIO’s span of control by moving people from both Results
organizations into a direct reporting relationship • Day One was issue-free with no disruption of operations or
customers
Create a short-term roadmap. The IT integration team created • Over the following months, the IT systems of the two companies
a detailed roadmap to achieve Day One goals and build the IT were combined, with no redundancy of infrastructure, services,
organization for the future. While systems integration plans were or management
being developed and executed, the IT and HR management:
• Nine months following Day One, third-quarter results showed that
• Designed and executed incentive plans for retaining transition most merger synergies had been achieved and overall cost savings
employees through Day One. Managers were trained to address were ahead of plan
employee concerns and support the offer process
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M&A IT — Integration
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Wired for winning?
50
M&A IT — Integration
52
M&A IT — Integration
Data is the lifeblood of virtually all organizations. While it may be Understand the data
difficult to place a monetary value on an organization’s data, we
One common pre-M&A activity we have seen is an assessment of the IT
believe it is one of the most valued assets associated with a Merger and
infrastructure of the organization that is being acquired. This assessment
Acquisition (M&A) event. Yet we have found that the role data plays in
would be beneficial for a variety of reasons, including assisting in the
an M&A transaction is often understated, and its potential to impact
estimation of potential cost savings that could result from establishing
ultimately the achievement of anticipated M&A synergies is frequently
an integrated IT environment.
misunderstood. Data must be given appropriate attention across the full
range of M&A planning and integration activities to better position the Though such assessments usually include a variety of data-related
organizations involved to realize its potential value. facts, e.g. the number of databases, data warehouses, and other data
components, they often do not provide the insight necessary to properly
The data challenge
plan the data integration. Figure 1 illustrates key steps that should be
Imagine acquiring a company under the condition that its data will not considered in an assessment of IT infrastructure:
be available until well into post-integration activities or that it could only
Figure 1: Key data integration steps
be made available in a limited manner. Issues like these can reduce, or
even eliminate, many of the potential synergies anticipated as benefits
of the transaction.
data
ca l As
Though these scenarios may seem unrealistic, all too often techniques riti se
ec ss
cri t
for properly integrating data are misunderstood and the importance th ti
d
he l d
n
of the data is understated. And, although it’s common to begin data
ca
qu ata
ta
ers
ali
integration planning during pre-M&A activities, too often the pre-M&A
Und
ty o
activities do not fully address the risks associated with data integration
f
activities. This creates a merged company that is not ready to go Day
Steps to effective
One post-merger.
data integration
Alternatively, properly planned and controlled data integration efforts can
App d me
ls
th t h o
ro
e
g
nt
ri
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Wired for winning?
Although data challenges may not be completely avoidable, they can Interim solutions like this are often developed in the interest of expediency
be anticipated and planned for. During pre-M&A and early post-Day and typically at the expense of establishing an appropriate control
One activities, a range of assessment activities can be undertaken to structure. In today’s heightened, heavily legislated control environment,
understand the potential ease (or difficulty) of data integration activities. lapses in control structures can have significant negative corporate impact.
To avoid such potential lapses in control, newly merged companies should
The particular assessment methodology employed is less important
strongly consider the following control mechanisms:
than gaining an understanding of the data itself and developing a data
integration work plan that aligns with key merger milestones. Data conversion controls. Any control structure associated with data
conversion and integration should address all aspects of the process,
Assess the quality of critical data
from data extraction through conversion and integration.
When two companies integrate, the compatibility of their cultures is often
Spreadsheet controls and limits. The use of spreadsheets in lieu
a concern. The same is often the case with regard to data compatibility.
of system-generated reports presents unique control challenges. The
More than likely, the two companies involved in an M&A transaction will intention for the newly-merged company to use spreadsheets for interim
have different approaches to data governance. As an example, suppose operational and financial reporting should be explicitly assessed and
the acquiring company has a strong data governance program that determined in advance. Further, tighter controls should be in place, and
closely controls the quality and integrity of its data. Should the acquired spreadsheets should be used for a limited time only.
company not have a similar level of discipline, the potential for data
Apply the right tools and methodology
compatibility issues is not insignificant.
The potential for data integration effectiveness can also be enhanced by
To proactively manage the impact of potential pre-M&A and early post-
applying appropriate tools and methodologies. While many companies
M&A governance issues, potential gaps in data governance styles — and
may have adequate data conversion processes and procedures, they may
resulting data quality and integrity issues — should be closely assessed.
still lack the right tools and methodologies to perform a complex data
This assessment should include an examination of the relative quality of
integration effort.
key data domains (e.g., vendor, customer, products/materials).
Within companies that don’t have adequate data integration tools and
An effective data quality assessment should include the following
methodologies, IT personnel are often asked to adapt methodologies
components:
normally associated with other IT tasks for the data integration process.
Risk assessment of key data domains. Identify any risks associated with While such approaches may suffice, they may also lead to potential
critical data domains. For example, if consumer data is involved, the quality control lapses and data integration inefficiencies.
of the “Do not call flag” relationship may be of particular importance.
To fully address this issue, companies should develop a specific data
Data profiling and business rule analysis. A well-planned integration strategy and consider acquiring a data integration software
methodology for evaluating the quality of data should be employed. The suite as they develop their overall M&A strategy. The benefit of this
methodology should support evaluation of whether the quality of the approach is the establishment of a more effective controls system and,
data is sufficient to meet business needs. ultimately, greater data integration efficiency.
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M&A IT — Integration
Cooking lessons
A CIO’s guide to leading a first merger integration project
Secrets to effectiveness
Recipe for serving up an effective IT integration:
Recruit your sous-chefs: No one runs an effective integration project
• Get into the kitchen early: Be actively involved in due diligence alone, so pick two strong integration leads ASAP. Logical choices
• Make your grocery list and check it twice: Craft a well- are your most senior application and infrastructure leads. When the
agreement is signed, integration planning and execution will be their
considered integration plan
full-time focus, so they will have to be prepared to delegate their daily
• Fire-up the burners: Move rapidly toward an issue-free responsibilities to their staffs for the duration of the effort. By being
Day One involved from due diligence onward, they should have the knowledge
• Make the most of your meal: Take advantage of all potential they will need to really “cook” when the integration heats up.
merger synergies Check the ingredients you’ll be using. During due diligence, the
• Write your recipe notes and file them away: Learn from deal team usually sends a data request to the target company. This is
a golden opportunity to ask for details about the target company’s IT
your experience
operations that you’ll need to develop an integration plan. Request
information about the target company’s IT operations so that you can
fully understand the organization’s people, locations, and assets. Pay
As CIO, you’ve managed more than your share of projects. But now close attention to the following items that will very likely impact your
you’ve just received word that your company is actively planning for an ultimate integration approach and target synergies:
acquisition. Just another project, right? Wrong!
• Large contracts, especially any that are coming up for renewal
Managing the integration of another company’s applications and within 90 days
infrastructure with your own carries with it all the challenges of classic • Substantial IT initiatives that are under way or about to launch
IT projects — managing disruption and risk so business as usual is not
disturbed; implementing quickly so you can enjoy the benefits ASAP; and • Operating budget and capital expenditures for the current and
keeping a close eye on the budget. But you also have the added pressure prior year
of achieving anticipated synergies with “nonnegotiable” deadlines. Sketch-out a preliminary menu. With this information in hand, you
To put it bluntly, when you’re responsible for the IT integration should begin to lay out a comprehensive, high-level future-state IT
component of an M&A deal, you’re operating on a whole new level. It’s vision that aligns with executive management’s overall vision for the
like the difference between preparing a sandwich as an afternoon snack combined organization. You should also identify the key elements
and cooking Thanksgiving dinner for 12! If you’ve never led an IT team of your tactical work plan for integrating the two companies and a
through an M&A integration, here are a few things you must absolutely preliminary estimate of how long it will take. You won’t know all the
consider before you start cooking. details, of course, but you’ll develop a pretty good idea. You may
uncover immediate cost savings that will jump-start the synergies, and/
Get into the kitchen early: Be actively involved in due diligence or possible contract conflicts that will have to be resolved soon after
Day One. Regardless of what you uncover, it’s better to know these
If you wait until the day before Thanksgiving to plan your dinner, you’ll
things sooner rather than later!
find all the turkeys have been taken. Browse your cookbooks early in
November and call mom for her stuffing recipe. Find out if your in-laws Make your grocery list and check it twice: Craft a well-considered
are vegans. Order the 20-pound turkey. But first, make sure your oven integration plan
will hold a 20-pound turkey.
About a week before Thanksgiving, it’s time to really get down to
Likewise, don’t wait until the deal papers are signed before you start business. Decide exactly what you’ll be serving — turkey with cornbread
lining up the information and people you’ll need to map out an stuffing, green beans, mashed potatoes, pumpkin pie — and tofu loaf
integration strategy and plan. When you hear an M&A deal is “in for cousin Ellie. Break down the ingredients into a shopping list by store.
the works,” be proactive and link up with the deal team (or business Write out a timeline — decide which dishes can be prepared in advance
development) to get your own IT investigation going that parallels the and which must be cooked at the last minute.
financial due diligence. Most likely, you’ll be part of a larger deal team,
with representatives from each area of the company. Make the most of The same is true for your top-down integration plan. As the deal
your position to learn all you can quickly. team negotiates the fine points, leverage this relatively quiet time by
fleshing out your outline for the future IT operations that aligns with
Why? The more you know early on, the sooner you can jump-start your management’s vision for the combined company. Then create a detailed
integration planning, including your budget and synergy estimates. approach for implementing your plan.
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Wired for winning?
Once the merger is announced, you’ll be leading the mad dash to Fire-up the burners: Move rapidly toward an issue-free Day One
integrate the infrastructure of the two companies in advance of Day
The day before Thanksgiving, you’ll need to roll into high gear. Thaw the
One. The date for Day One is set by the deal team, but as CIO, you’ll
turkey. Wash and trim the beans. Set the table. Do everything you can
need to determine how long it will take to fully integrate IT — typically
in advance. Then Thanksgiving morning, cook the turkey and handle
12 or 18 months after Day One, or perhaps longer. The actual timeline
any last-minute items. If all goes according to plan, you’ll have time to
will depend on many variables, including how much your team
straighten the kitchen and tidy up before the doorbell rings!
can reasonably accomplish before Day One, the complexity of the
integration, and the willingness of the target company to share relevant Day One is likely to be even more hectic. Once the merger agreement
IT-related information before the deal closes. is signed, your integration team moves into overdrive to make sure
that Day One is issue-free. You should have an IT project management
Be prepared to present your macro-level plan to executive management.
office (PMO) that works in conjunction with the overall integration
Boil your thoughts down to three concise points:
PMO (sometimes called an IMO). Your integration team should focus on
• Outline of what you’ll be integrating (preliminary integration strategy) integrating the infrastructure right out of the gate (e.g., e-mail, active
• Amount of time you’ll need to integrate the IT operations directory, voice integration). They should streamline all contracts, looking
(high-level timeline) for “quick-win” synergy savings.
• Pro forma estimate of the level of tangible business value you expect This isn’t the time to think of “nice to do” add-ons — all nonessential
to achieve (synergy model) projects should be put on hold until the integration is complete. You’ll
need to focus your team on completing critical tasks before Day One, as
Why? A clear integration approach and plan for the future IT operations
well as contingency plans to maintain business continuity.
of the combined company will allow the IT integration team to
quickly mobilize and execute. This should also allow you to clarify and Why? By anticipating possible Day One issues, you can focus your
communicate integration expectations with your business counterparts integration efforts on making sure the basics are covered, and you’ll be
who are highly dependent on IT solutions for their functional integration well-prepared if something goes awry.
and synergy capture.
Secrets to effectiveness
Secrets to effectiveness
Call Aunt Betty to confirm she’s bringing the pies: You cannot
Set your integration strategy: With a project as complex as post-merger assume that everyone will be on track for meeting their Day One
IT integration, it’s easy to lose sight of your ultimate goals — an issue-free responsibilities. At least a month in advance, the overall integration PMO
Day One and achievement of synergy targets. To keep your team on track, should lead you through a readiness certification, which is a detailed
create a clear depiction of the end-state vision, guiding principles, and high- list of specific questions that helps people throughout the organization
level scope (Day One and end-state) that will used to support and guide all decide if they are really ready for Day One. As part of the certification
key decisions. Sample guiding principles might include: process, management is required to sign off on these items:
• Consider your company’s existing solutions first, the target company’s • Are all the Day One preparation tasks complete?
solutions second, and the new solutions (developed or purchased) as a • If tasks are not complete, what is your plan for getting them on track?
final resort. This is often referred to as “adopt and go”
• What is the contingency plan if the original plan fails? (This is critical
• Focus on the must-haves for Day One (e.g., e-mail, secure file transfer, for areas that are high risk or at a high probability of failure.)
management reporting)
• Set clear goals and target dates (e.g., IT integration will be complete Post the turkey hotline number on the fridge: Day One changes
within 12 to 18 months) affect nearly everyone in the organization, so be proactive by setting up
a Day One Command Center to provide temporary support specifically
Develop your game plan: Full integration of all elements of the for Day One. The Command Center should link with your internal Help
merging IT operations will probably not be feasible — or desirable. Desk to provide support for problems related to Day One, typically
Determine, on a case-by-case basis, the appropriate level of integration through a hotline phone number. The Day One Command Center is
for each key IT component. Then figure out what you’ll complete by Day internally focused, so your customers, suppliers, and other external
One and what will be completed afterward. stakeholders should continue to use their normal support channels.
Don’t rule out the option of “ordering-out”: Consider all viable Communicate, communicate, communicate: All employees will feel
solutions to achieve efficiencies. In most cases, you’ll likely integrate the the impact of changes in the IT systems, so communicate the changes
target’s operation into your own. But before you make final decisions, they can expect in advance. Typically, the company-wide communications
look at each area on a case-by-case basis. You may find that they have a team publishes a “Day One survival guide” or “welcome package” for
better vendor contract or more efficient help desk operation. all employees. An important part of this is package is a list of what is
changing and what will remain the same. You’ll also include information
on how to contact the people who will help them with Day One issues.
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M&A IT — Integration
Make the most of your meal: Take advantage of all potential Write your recipe notes and file them away: Learn from
merger synergies your experiences
Thanksgiving dinner was a success. The turkey was moist. There was You’ve learned a lot from your first Thanksgiving dinner. Next year, you’ll
enough pie for seconds. And no one noticed that the mashed potatoes order a slightly smaller turkey and save a few bucks. And you make a
came from a box. Once the dishes are cleared, take a well-deserved rest. note on your recipe card to cook the beans a little longer next time.
Tomorrow, you’ll focus on making the most of those yummy leftovers.
And finally, your merger integration work is complete. If all has gone
So your team survived Day One. Time to relax? Hardly. The real work is according to plan, your integration team has achieved the IT end-
just beginning. You should already have a plan under way to complete the state vision and captured your share of the promised synergies. Now
integration. Now it’s time to start fulfilling on the synergy promises made that you’ve completed your first merger, take time to document what
at the outset and thinking of ways you can help exceed those promises. worked well and what you’d do differently next time. You can be sure
that Thanksgiving will come around again — and most likely, so will
Why? You should accept the inevitable: Senior management will expect
your next merger.
IT to make a large contribution to the cost synergies. You’ll be ahead
of the game if your team identifies additional opportunities in case of
leakage or raised synergy expectations.
Secrets to effectiveness
Turkey lasagna, anyone? Soon after Day One, bring together your
integration leads from both sides for a synergy brainstorming session.
Your goal is to create a bottom-up plan for meeting the IT synergy goals.
By this point you should know exactly what you’re dealing with and what
you need to accomplish. Start with the top-down plan that you developed
from the due diligence, flesh it out and challenge your assumptions. If it
appears you’ll fall short on meeting synergy targets, brainstorm how you’ll
make up the difference. Or, if you’re lucky, maybe the team will find an
unexpected nugget that will help you exceed expectations.
Decide who gets the leftover pie: Be prepared to link synergy savings to
your IT operational budget. So if the team cancels an IT initiative that called
for 100 new laptops, who should claim the savings? IT, if the cost of the
laptops was in the IT operating budget. But if the laptops were budgeted by
sales and marketing, they are entitled to the cost savings. The lesson? Make
sure you can trace projected synergy savings back to your operating budget.
Track of your progress: Implement a synergy reporting system, tied to
the IT operational budget, so you can track progress toward your goals.
Variance from the plan should be easy to identify so that corrective
actions can be monitored. Expect the company-wide PMO to request
monthly synergy progress reporting.
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Wired for winning?
your shareholders are looking for? Have you ever considered what it IT funding and governance IT organization
would take to give your IT organization a fighting chance to smoothly
integrate these new business entities? We believe getting IT ready to • Strategic IT planning and
investment (portfolio
M&A IT execution • IT organization structure
• Capacity management
support business growth by acquisition is clearly one of today’s critical management)
and strategic sourcing
• Integration program
business challenges. • IT spend analysis management office • Skills and competencies
• Target portfolio mix • Transaction governance • Facilities and work
IT readiness is dependent on many factors; there is no one element that • IT governance, • Synergy capture and validation environment
is common to all acquisition scenarios. IT organizational profiles can vary program structure,
• Communication and
and management
greatly, from a loosely knit conglomerate of dissimilar entities supporting change management
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M&A IT — Integration
0
1 2 3 4 5
-5
-10
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Wired for winning?
Let’s examine the merger of two banks as an example. If an acquiring Figure 3: Potential integration scenario for merged companies
bank decides to centralize the loan approval process after the acquisition
is complete, the acquirer could require the acquired bank to send loan
applications across its system boundary to the acquirer’s loan approval
system. With an EAI middleware infrastructure, the acquiring bank could New business process
achieve such workflow integration with relative ease.
Systems supporting new business process
Service-oriented architecture
If middleware provides a quick and easy way to integrate applications
and business processes between companies, then an SOA lays a solid
Services Services Services Services Services Services
foundation for the combined entity to achieve long-term post-merger
integration excellence, both for IT and the business. SOA foundation SOA foundation
There’s no doubt, SOA is a hot topic. It has been for several years, and
only recently have more companies taken significant steps to implement Legacy
system
Proprietary
system
Other custom
system
Legacy
system
Proprietary
system
Other custom
system
an SOA. This migration toward SOAs has been partly driven by the
maturing of SOA technology and widespread vendor support for SOA. Acquirer’s SOA environment Target’s SOA environment
Another driver has been the appealing values and capabilities an SOA
brings to solve some of the most common challenges of post-merger
Source: Deloitte Consulting LLP
integration. Such challenges include:
• Ability to implement and support new business requirements Consolidation packages vs. ERP level consolidation
and processes. Merged entities often create a new vision or strategy
for going forward, and the new vision and strategy often leads to new In an M&A transaction that involves large companies, there’s a good
business requirements or processes. Further, executive management chance that ERP systems will be part of the IT environment at both
sometimes asks the IT organization to quickly develop a solution to companies. Integration of ERP systems is typically one of the biggest IT
support the newly created business processes. This is often a failure challenges in an M&A transaction. Moreover, given the importance of
point, and it can sometimes be attributed to inflexible and rigid ERP systems, ERP is, and will always be, one of the critical components
architectures that do not respond well to changes. However, with in any enterprise application architecture.
a robust SOA solution, IT should be able to quickly create service At one extreme of the application consolidation spectrum lies the
components as needed and reconfigure the IT capability to meet the strategy of consolidating all acquisition targets onto a single ERP
new business demand. platform; the other extreme is to leave both ERP systems intact and
• Ability to protect existing IT investment at both the acquirer separate and perform financial consolidation and management
and the acquired. In some cases, a company may take a “rip reporting at the corporate level using business intelligence toolsets.
and replace” approach to legacy applications that are deemed too Every M&A transaction is unique, and there is no definitive answer as
difficult to integrate. This drastic approach is usually an enormous to which strategy is correct. However, there are certain considerations
multiyear effort, a significant disruption to business operations that a strategic acquirer or seller should keep in mind when deciding
— often — requires a multimillion-dollar investment. SOA gives how to effectively integrate the ERP of an acquired business. These
companies another option. Instead, companies that implement considerations are:
an SOA can treat their existing applications’ functionality as • Industry-specific ERP. As an example, let’s say an acquiring company
reusable service components to be consumed as needed by other wants to maintain multiple ERP platforms. This decision may seem
applications, and hence improves the Return on Investment (ROI) on odd, given the rise of total cost of ownership of maintaining multiple
existing applications. platforms and vendor relationships. However, the company may elect
• Ability to integrate heterogeneous IT environments. this strategy based on its growth strategy, such as varied acquisition.
Sometimes, IT organizations have little experience with the task of And, if the company operates in multiple industries, the choice is clear
integrating disparate IT environments — which is typically required to us: run specific, industry-standard ERP platforms for each managed
in an M&A transaction. Further, custom-developed applications are division, and do not try to integrate all businesses on a single ERP
often difficult to integrate, because they require custom-written platform. This strategy could reduce risk and increase the likelihood that
interfaces in order to integrate them. However, the component- an acquired company is ready for business on Day One post-merger.
based structure of an SOA facilitates a more straightforward process • Line of business-specific instance. Most companies base their
of IT application integration. ERP instance strategy on either geographic or business groupings.
For companies that intend to go through a series of acquisitions or
Figure 3 depicts how SOA architecture helps to facilitate post-merger
divestitures, it may be wise to consider grouping like businesses on
integration.
the same instance. This greatly eases the carve-out of the business
An SOA is not only valuable in the post-merger integration process. It to be sold.
offers a significant advantage in improving internal IT operations and • Data tagging. No matter what strategy a company chooses to
efficiencies for the combined company in the long run. It is a strategic integrate acquired businesses, one important consideration is the
architectural foundation to build on. tagging of data according to business unit.
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M&A IT — Integration
Technology and industry standards • Leverage the VM environment to streamline and simplify the
infrastructure support and maintenance. Bringing servers onto
Certain applications seem to be de facto industry standards. Choosing
a common VM platform can facilitate a unified and centralized
a particular application built specifically for an industry increases
server monitoring and control mechanism. Centralized maintenance
the likelihood that the acquisition target also operates on the same
and support can increase overall server availability. In addition, the
platform, and it eases the integration effort.
provisioning of a new server can be easily handled by adding a new
Although implementation standards at companies involved in an server instance on an existing VM server, thus improving provisioning
M&A transaction may be different, choosing to implement industry de speed and user satisfaction.
facto standard applications can facilitate easier integration. It can also
As an example, let’s consider a merger of two Internet hosting
allow the acquirer to realize benefits by strengthening its negotiation
companies. Both companies are operating on a dedicated server
position with software vendors to restructure the terms and conditions
hosting model for their clients. The operating model has led to an
of software contracts. Therefore, even though companies might have
increasing demand on the data center, server power consumption, and
unique requirements and may contemplate building custom applications
space usage. All of which have become major cost factors impacting
to accommodate those requirements, the use of de facto standard
the companies’ financial performance. As part of the post-merger
applications may meet the requirements and save costs in the long run.
integration plan, the companies could implement VM technology to
Infrastructure architecture dramatically reduce the number of dedicated servers by virtualizing them
via VMWare.
While it is important to maintain a “plug and play” enterprise
application architecture, it is equally important that the underlying As with any technology, VM technology is a solution meant for certain
infrastructure supporting the applications is “plug and play” enabled. situations and scenarios; it is, by no means, a silver bullet for all IT issues.
One way to enable a “plug and play” infrastructure is to use The level of virtualization is also an important consideration that varies
virtualization technology. by company. Some applications and servers are perfect candidates for
virtualization while others are not. Companies must strike an effective
Virtualization technology balance between the virtualized and traditional environments, not only
Virtualization technology can be key to enabling a “plug and play” in preparation for a potential future acquisition, but also in improving
technology infrastructure. And, it can be crucial to capturing major IT their own internal IT operations.
cost savings and operational efficiencies post-merger. Platform flexibility
Just a few years ago, the concept of a Virtual Machine (VM) was For most post-merger integration scenarios, the IT platform of
indeed more concept than reality. Now, it’s one of the hottest trends in the acquiring company has to be flexible enough to absorb the
IT, getting attention both inside and outside of corporate boardrooms. infrastructure components of the acquired entity. SOA and VM
CIOs of big and small companies alike are increasingly leveraging the technology are currently the prevailing methods of delivering that
latest VM technology in making their IT operations lean, yet effective. flexibility. Regardless of the chosen method, an acquiring company’s
One key challenge most strategic buyers face post-merger is how priorities should be focused on its own IT infrastructure. The focus
to effectively and efficiently integrate fragmented and disparate IT should be on implementing technology and processes that provide a
infrastructures. Each company’s IT environment may include numerous high level of performance and flexibility and equip the company to
data centers at multiple locations across the world, with heterogeneous integrate with acquired companies quickly and effectively.
server hardware environments used by different businesses for different IT organization
purposes. The issue becomes one of integrating such a massive and
messy environment. The “plug and play” characteristics of an IT organization usually
mean the IT organization has to be nimble and flexible enough to
The advantage of VM technology is that it allows companies to “plug” accommodate change or allow speedy integration with the target’s IT
heterogeneous systems onto a common hardware platform and allows the organization. Some of the key areas to consider for a nimble and flexible
existing systems to continue to operate (i.e., “play”) as they do currently, IT organization include the following:
with low disruption or downtime. With this technology, an acquirer
can also take advantage of the merger situation and quickly improve Core skills (IT management, business analysis, etc.)
the IT infrastructure for the combined entity. By using VM technology,
In any IT organization, it’s important to identify industry-specific IT roles
infrastructure optimization can be achieved in the following ways:
and recruit talent that are both common and mainstream within the
• Combine underutilized server hardware resources at both industry. It’s also important that there is low dependency between roles
companies onto a single VM platform. This approach not only so that they can be easily changed.
can increase the server utilization (i.e., better ROI), it can also reduce
the number of servers that must be maintained at the combined With strategic acquisitions, it is quite common that the acquirer and
company. The reduced number of servers could also result in target are players in the same market segment and sell similar products
considerable savings on data center power consumption and facility or services. This sometimes simplifies the integration (applications are
rental expenses. similar, staff are familiar with the business concepts, etc.). However,
differences may exist concerning IT’s role or strategy. Existing IT
• Upgrade legacy hardware platform via VM. One common theme management processes and company cultures can play a crucial role in
in any M&A transaction is the likely discovery of certain mission-critical the initial stages of assimilation. Organizational differences should be
applications still running on outdated server hardware platforms, given due consideration before beginning the IT integration process.
which could fail at any moment. VM technology can help avoid For example, a globally centralized IT organization may require different
expensive one-to-one server replacement by bringing the company skill sets and experience than an IT organization that is federated and
onto a flexible VM-enabled server platform. regionalized. Many companies have found positive results by taking a
phased approach to integration, allowing for a natural mapping of skills,
thus facilitating long-term synergies.
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Wired for winning?
Organization structure In addition, many buyers (strategic and financial) request that sellers
provide IT services via Transition Services Agreements (TSAs) over a
There are many ways to structure an IT organization. Common
predetermined period of time. In many instances, much time and effort
organization methods include by function, by business units or
is spent on determining and negotiating with vendors as to whether
departments, or by geographic locations. Regardless of the IT
the existing software or hardware licensing agreements allow the seller
organization’s structure, the roles and responsibilities between internal
to provide such services to a third party. Though problems may never
IT departments and business functions should be clearly defined, and
be fully avoided due to individual vendor issues, savvy negotiations up
the structure should be aligned with the overall business objectives.
front and well-kept records of each agreement can save effort and avoid
A decentralized IT organization, with dedicated IT support for each
delays when the transaction closes.
business unit or departments, will lend itself more easily to a “plug
and play” structure, with the retention of knowledge of IT systems and Also, due diligence is more effective with target companies where a
infrastructure within the business units. paper trail is organized and available. Any steps that management
can take to simplify the due diligence process will ultimately result in
As with core skills, the acquirer and target might have similar IT
efficiency and help avoid delays in closing and/or ill-informed decisions.
organizational structures (e.g., organized by business units) if they
operate in a similar business. In any case, a clear structure definition IT governance
and its alignment with business goals can facilitate post-merger IT
The enterprise IT governance model is another important factor. Some
organization integration and lead to the organizational synergies that
effective IT organizations are organized around decentralized IT, with key
shareholders expect.
business and IT roles existing at the line of business or business unit level.
Outsourcing Though decentralization may increase the cost of IT operations, it usually
facilitates a quicker IT decision-making process and can simplify integration,
More and more, outsourcing is an integral part of any IT operation.
or divestiture, of the IT organization through an M&A transaction.
Many companies now rely on outsourcing relationships for many critical
services, from application maintenance to telecom and data network M&A IT execution
support. To stay “plug and play” on the outsourcing operation, an IT
Last, but not least, is the execution capability of the IT organization.
organization should be familiar with the terms and conditions of the
Even with the right components, the effectiveness of the “plug and
outsourcing contracts and should try to negotiate contracts in a way
play” model depends greatly on a company’s processes and tools.
that is flexible and easy to terminate or change, in the event of a merger
or acquisition. Three relevant focus areas are:
In addition, outsourcing relationship evaluations are also an important • M&A transaction governance
consideration for future M&A transactions. In choosing an outsourcing • Change management
relationship, their ability to expand its services quickly could have a direct
impact on the timeliness of integrating an acquisition or divesting a part • M&A IT processes and tools
of the business. Some key attributes of typical outsourcing providers are: Also, even with appropriate planning for the M&A transaction, the IT
• Rapid access to additional hardware, server, and storage space organization must still be able to execute the plans effectively. Typically,
experience breeds effectiveness, and companies that have participated
• Swift access to additional network bandwidth
in multiple M&A transactions often fare better than companies that
• More robust skills to assist with disparate systems integration are undergoing the process for the first time. The execution of the IT
• More flexible architecture to take on additional hardware (server, integration process is where third-party integration advice and assistance
storage, etc.) from acquired business can often be extremely valuable, especially to companies that are
attempting post-merger IT integration for the first time, or that lack a
IT funding and governance series of deals to draw upon.
IT cost structure Wrapping it up
Cost structure is a major issue in M&A transactions, and companies Across all industries and despite the presence of numerous integration
should determine whether their current cost structure allows for quick methodologies that permeate the marketplace, the rate of merger
“plug and play” transactions. Costs can be divided into: effectiveness continues to be disappointing; most studies suggest
• Ongoing costs (fixed or variable recurring costs) that 50 percent to 70 percent of mergers fail to create incremental
shareholder value.1 The reasons for failure are myriad and include poor
• Project costs (discretionary; currently in flight)
strategy, bad deal-making, and, most notably, failed IT integration
This division allows for greater opportunity to achieve synergies and — which our research shows is the reason for close to half of all failed
reduce costs. mergers. Most of these failed IT integrations are due to the lack of
preparation or planning or to poor integration execution.
Contract terms
The “plug and play” M&A IT integration framework presented here is
Another important consideration is the expandability, or reducibility, by no means a silver bullet that addresses all of the IT challenges that
of software or hardware licensing agreements. Any company that can result from a merger or acquisition. However, it does present a
anticipates acquiring or divesting a business in the near term should time-tested and well-structured approach to consider for any M&A IT
only have licensing agreements that can be expanded (to allow for an integration effort. It can also be used to help prepare IT organizations as
increase in the number of users) or reduced (to allow a reduction in the they face the many possible challenges ahead.
number of users, or a transfer of a portion of the licenses to a buyer)
economically. This upfront planning and negotiation can make for an
Notes
easier transition during deal time.
1
“Solving the merger mystery: Maximizing the payoff of mergers & acquisitions,” Deloitte,
February 2000.
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M&A IT — Integration
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M&A IT – Divestiture
If putting two businesses together is difficult, so is taking them
fail to deliver value. And the business that’s left after the dust settled
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Wired for winning?
4. Think through all of your options; don’t rule anything out Another often overlooked item in this area is TSA exit support. There
usually is a major focus on getting to Day One and setting up the
When you are making large-scale changes in an M&A environment,
required TSAs, but most CIOs don’t think about securing TSA exit
both operational and financial, in a very short time frame, the rules will
support from their parent while they still have some leverage. To position
change. During a carve-out, replicating current operations probably
your organization for a rapid and cost-effective TSA exit and transition,
should not be the answer. But before you can begin to paint a picture
before the deal closes you must discuss, document, and agree to all the
of your future IT organization, you must first establish and understand
services and help you will need (from pre-Day One through the end of
the basic guiding principles and constraints (overall and IT-specific) for
the TSA period and beyond). Once the transaction closes, you will lose
the carve-out. The delivery options typically viewed as taboo yesterday
negotiation leverage and be at the mercy of your former parent to set
(e.g., IT outsourcing, less scope, offshoring, reduced functionality, or
terms and conditions.
buy versus lease) may be the only viable answers tomorrow. Don’t rule
anything out! 6. Be prepared to eat lots of soup
Actively encourage your internal business and IT resources and your Eating soup is not bad if you like soup. But if you’re used to drinking
external relationships to challenge the status quo: “Think out of fine wine and eating filet mignon, soup will be thin fare indeed. Since
the box” and diligently brainstorm how you can create the desired most carve-outs involve separating a business from a larger parent — a
future state. In IT carve-out situations, it is often easiest to start with parent with deep pockets — you should be prepared to make significant
the minimum mandatory IT requirements and build from there. For changes to your expectations. As a CIO, one of the first things you will
example, what is the required applications functionality for the business need to do is identify your likely going-forward IT budget. It’s likely that
to continue operations and hit the future business goals? What are your new budget will be a fraction of your old one, and you’ll quickly
the mandatory IT infrastructure requirements to support the business? realize that backing into the budget on a short-term basis is extremely
What are the most cost-effective methods of delivery? While questions difficult, if not impossible. There are, however, a number of key things
like these can create some difficult dialogue between the business and you should consider to improve your position:
IT, they’re absolutely necessary to achieve the carve-out goals. If the
See tip number 4. You will absolutely need the flexibility and cost relief.
business (the entire business) and IT can join forces and stay “connected
at the hip” to challenge the status quo and lay the foundation for See tip number 5. You will need short-term help. It’s better to have
change, the carve-out can truly represent a significant opportunity for used furniture than no furniture at all.
the organization.
Put on your scope control hat and take your relationships with
Ten times a day ask yourself, “How are we possibly going to get this the CEO and CFO to another level. Given budget constraints, you will
much work done in the time allotted?” Regardless of your carve-out plan, need to work with your IT leadership team and the business leadership
there will be a lot of parallel work and an aggressive timeline. The IT PMO team to evaluate and rationalize IT scope. Keep it simple. Strive for plain
(see tip number one above) must play a key role in laying out the plan, “vanilla” implementations wherever possible. Be ruthless with scope.
identifying cross-functional and cross-project dependencies, and helping Every request for non-standard functionality should require close scrutiny
to orchestrate the program. Everyone must understand the timeline and and approval. If you set an example early in the process and keep the
commit to getting their piece of the puzzle done. The speed and multiple scope tight, the requests will slow over time. But you can’t do it alone.
parallel moving pieces associated with an IT carve-out are typically very You’ll need a lot of help from the CEO and CFO to set the stage for the
difficult for IT outsource providers to deal with using their standard organization to “think lean”: everyone needs to understand that for the
processes. If your activities involve IT outsourcing, take the necessary steps carved-out organization to be successful, it won’t be able to afford a lot
to prepare the outsourcer to accelerate standard processes and approval of IT bells and whistles.
procedures to enable an aggressive timeline.
Enlist the help of your external relationships. In most carve-out
5. Convince your parents to let you take what you need situations, there is a need for some external resources to help meet
(and nothing more) short-term IT budget requirements. (But if you don’t ask for help, you
will absolutely not get it.) This help can and should take many forms: IT
See the moving truck filled with furniture? The carve-out is one of the
procurement pricing discounts, contractor and consultant price reductions,
most important moves of your life. To achieve the benefits of this tip,
software leasing versus buying, spreading carve-out set-up cost payment
you will need to start thinking early about your “wish list” to be put
over an extended period of time; potentially back-end loaded to a period
into the deal documents. But be careful: Don’t ask for everything you
where you can better afford payment, to name a few.
could possibly take (e.g., people, assets, applications, infrastructure
components, historical data, licenses, TSA set-up and exit, and knowledge Plan for the depreciation bubble. In most cases, IT carve-outs
transfer services). Rather, keep it simple. Ask only for 1) what you require significant one-time setup costs (e.g., IT infrastructure setup,
truly need; 2) what you can afford; and 3) what will help your budget equipment purchase, ERP implementation). All of these present CIOs
regarding carve-out set and/or run costs later. You’ll want to ask for more, with yet another budget challenge: the depreciation bubble. Given the
but avoid the urge with one major exception: free services. constraints of the typical IT carve-out, there is little CIOs can do to avoid
the bubble, but there are some tips you should consider to help reduce
One common issue of contention should be addressed early, and that
its impact on your short-term budget: for example, you can make new
is the separation of shared assets (e.g., people, hardware, software,
decisions about leasing versus buying hardware and software, leasing
application, telephone switches, licenses, etc.). To reduce the cost, risk,
existing data center space versus building new, transferring existing
and arguments created by these situations, gain clean agreement and
software licenses from your parent, and taking existing fully depreciated
then document a tactically possible approach (don’t forget to agree on
PCs from your parent. While there are no silver bullets in this area, if
who will pay the costs). This topic may seem trivial, but it’s a fight-starter
you’re aware of the bubble and manage it, you have a fighting chance
on almost every deal.
to hit your budget.
The CIO can pull a lot of internal and external levers to achieve short-
and long-term budget requirements. You still might have to eat soup
most days, but at least you will have the chance to splurge once in a
while down the road.
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7. Make sure your parents commit to giving you a lot of help 8. Expect to wait until your parents’ cribbage game is finished
initially (you will likely need it) before they will return your calls
If your IT operations are heavily integrated with your parents and if you Expect your relationship to change. When you were a child, you parents
have an aggressive close window, you will likely need transition service responded immediately to your requests. Once you move out of the
agreements (TSAs) for a short period of time (typically 6 to 12 months). house, you might not get the same attention. The pattern is no different
The development of the TSAs should be viewed as a critical strategic for IT carve-outs.
instrument. They are important for two reasons:
When you are owned by the parent and contributing to the profit and
First, they will have a major impact on the effectiveness of Day loss, you are a top priority. When you are a carve-out, your position on
One. If the TSA services are not ready and done correctly, you will have a the priority list will drop, sometimes dramatically. To protect yourself
major problem as a separate entity and your business may be put at risk. from the changing relationship, do your due diligence, planning,
and negotiations immediately. Your best friends today may not even
Second, they are a vehicle for efficiently migrating to the future
answer your calls tomorrow. The people left behind at the parent
state. If the TSA period is bumpy, chances are your migration to the
company have bosses to please and — guess what — your priorities
end-state will be difficult as well. Here, your best defense is a strong
aren’t theirs anymore. Also, your parent’s memory is not what it used
offense: The party that drives the TSA development usually ends up in a
to be. Get everything in writing (even if it’s just in an e-mail). If you
better position from a service delivery and pricing perspective.
have a disagreement after the close and you don’t have promises and
You can and should play a major role in the development of the TSAs in agreements in writing, chances are you’ll have a battle on your hands.
the following areas:
9. Stay close to your best friends
Service definition. Even though the TSAs are legal documents, you
The one characteristic of every effective IT carve-out is the strong
and your team (not the attorneys) should provide the most important
relationship and alignment between the business and IT. To be effective,
input. Play a leadership role in identifying and clearly documenting
IT must stay “attached at the hip” with the business (your best friends).
the short-term services you need. Make sure the services are clearly
In designing a blueprint for the future, the business and IT need to
spelled out in the document. If the service request is vague, it will
spend quality time together, function by function, process by process.
likely lead to contention later. Gain clear agreement in writing while
As you discuss future operations from three perspectives — people,
you still have some negotiating leverage.
processes, and systems — given carve-out and budget constraints, you
Service levels. Chances are your parent is not set up to be a service will need to pull multiple levers and make some difficult decisions to
provider and cannot routinely provide the performance metrics of a achieve your goals. If you complete the process together, collaboratively,
typical outsourcer. But that should not prevent you from demanding you will reach your goals with a clearer understanding of why decisions
specific service levels to keep your business running efficiently for the TSA were made, why scope elements were eliminated, and how you can
duration period. Make sure appropriate monitoring and issue resolution work together to make the blueprint work.
processes and tools are put in place so you can protect your business.
Don’t be afraid to lead and teach the business. The typical IT
You’ll be happy you pushed this issue if you do have a problem later.
organization thinks in “MS project” mode that’s all about projects,
Duration. In most cases, you will want to limit the duration of the TSAs planning, and execution. The typical business function doesn’t. If you
for cost and risk reasons (not to mention the fact that your parent will help the business through the planning process, you will have joint
not want to be in the service provider business any longer than it must). ownership of the plan and joint ownership of implementation results.
Be careful, however, to make sure the TSA duration gives you and your
10. Choose your roommates carefully
team enough time to unwind the TSAs and smoothly transition to the
exit solution. If you don’t build in enough time, you may find yourself Effectively completing a carve-out is difficult. If you don’t have the right
implementing a less effective solution and spending extra money just to team (the right roommates), it can be impossible. One of the first tasks
hit your deadline. Set an aggressive, but achievable, timeline for TSA exit. that you should work on is picking people who have the right skills,
the right experience, and the right caliber. You probably won’t be able
Pricing. Negotiate the TSA pricing as early as possible, certainly before
to take all of the A players with you, but don’t settle for a cast of C
the deal is signed. If you wait too long, you will lose your negotiating
players. If there are A players critical to your business, fight for them. If
leverage. Nobody will want to delay deal closure because the CIO can’t
you believe your parent is using the carve-out as an opportunity to clean
achieve favorable TSA pricing. The TSA pricing will be a rounding error
house (yes, this does happen), demand the names be removed from the
for the overall deal, but it could be a showstopper for your short-term
transfer list. If you accept surplus resources today, you’ll bear the cost of
run rate.
addressing the situation later.
Exit-cost relief. A key strategic component of the TSA pricing is exit-
If you can’t find the right employees in the parent organization, don’t
cost relief. You will likely exit the TSA in phases, so you need to address
be afraid to look externally. In many carve-out situations, the role of
the cost relief issue early and clearly. A well-schooled seller will give you
IT changes dramatically and the skills to support the new operation
cost relief only when the total TSA is exited. Be aware of this issue or
may not reside in the company. For example, if you’re moving from an
you might pay double for services.
internal-oriented IT environment to a largely outsourced environment,
Exit support. The last consideration is exit support (often overlooked, your team may require new and different skills and experiences.
but very important). If you have a well-thought-out TSA exit solution,
Don’t be afraid to let go of some parts of your past. You need to design
but don’t have the migration or knowledge transfer support available
and staff for the future.
from your parent, you will have a major problem. Before you sign any
TSAs, make sure you and your team clearly think through how you will
exit from the TSAs and what support you will need from your parent.
Also, identify who will bear the cost of migration activities. In most
cases, the exit costs can be material. Try to make your parent bear the
cost of the exit support. The parent wants to close the deal, so usually
that strategy will work.
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M&A IT — Divestiture
Fast break
A way to design and manage TSAs to achieve a fast and clean separation
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Wired for winning?
At a minimum, the buyer should identify its high-level strategy — e.g., Prior to Day One, both parties will need to agree on the scope of services
build, buy, outsource, or terminate the function altogether. Once an to be covered under a TSA. For example, near the end of the TSA the buyer
overall plan has been established, the team can develop the timeline may be expecting the seller to provide migration services, such as extracting
and estimated costs to implement the plan in the agreed time frame. It data, cloning systems, and sharing their knowledge and experience with
is important for both the buyer and seller to be realistic about when the the new service provider. Defining the charge-back rules for such activities
TSA can end. Setting unrealistic targets with the idea that the TSA can before the deal closes helps both parties produce a better migration plan
be easily extended does not help either organization plan efficiently and and leaves the buyer with some bargaining power with the seller.
ultimately results in the buyer’s not being ready to inherit the process,
Partner with the business. IT is a business enabler. Therefore, every
system, or environment. When defining the exit strategy, it is also
business TSA should be evaluated and paired up with the corresponding
important to understand the dependencies within and across services
IT TSA. Stand-alone TSAs should be avoided, unless there are no
to prevent systems and or services from breaking. For instance, security
reasonable alternatives. Note that individual TSAs may be required for
access and control services are typically one of the last to be transitioned,
distinct and separate services and for different geographic regions that
since controlling access to the environment is critical to guaranteeing
are providing or receiving service.
service levels on services such as network routing and server hosting.
Another example is tying services like e-mail and VPN to desktop support, Connect the dots. A master services agreement (MSA) can provide an
since one can’t typically provide support for one without the other. overall structure for all of the TSAs, explains the hierarchies of various
documents, and lists the services to be provided. It can also define the
Understand your costs. This is one of the most important elements
billing terms and conditions and describe the overarching principles
of a TSA. To avoid disagreements down the road, both parties must go
for terminating the TSA. Last but not least, an MSA can help avoid
into the agreement with a crystal-clear understanding of costs and cost
contradictory language by providing a central location for legal terms
drivers. Clearly define the cost components and assumptions that will be
and conditions so they can be defined once and then referenced in
used to calculate costs. Identify both fixed and variable cost elements, as
supporting agreements and exhibits.
well as the factors that will drive cost, such as headcount, office space,
location, server utilization, and network bandwidth.
Put it in writing. Once the services that will require TSAs have been
Understanding the cost drivers helps both parties develop a fair plan to determined, it is time to put pen to paper. TSAs for every function should
migrate off the TSA. For example, activities that are likely to decrease follow a standard format and template that has been approved by Legal (see
over time (e.g., desktop support migration) might include “step-down sidebar: Key elements of a TSA). Keep in mind that this is the most time-
events” where costs go down as the buyer becomes less dependent consuming aspect of finalizing TSAs as both parties contribute to the editing
on the seller’s services. Other activities that are more likely to remain of the content, and both legal departments must approve the verbiage.
constant (e.g., mainframe hosting) might be defined at a fixed cost until
the last remaining user/resource is removed.
Description of services not included under a TSA — This helps to
Note that identifying the costs and cost drivers for transition services can provide additional clarity on services or portions of a service that
be quite a challenge, particularly since most sellers are not in the business the seller does not intend to provide. Remember that the roles and
of selling services and may lack the systems, tools, experience, knowledge, responsibilities of support groups can vary greatly by organization,
and skills to accurately analyze service costs. In such situations, sellers so they need to be clearly defined.
should attempt to identify some benchmarks that can serve as a gauge
for identifying standard costs for their particular industry and size. These
benchmarks can be obtained by performing a quick survey of outsourcing Designate the manager or executive responsible for delivering the
services and the current market rate for these services. transition services as one of the primary authors of the TSA. This helps
produce a better, more realistic agreement and helps avoid confusion and
Define the charge-back rules. The TSA must clearly define what finger-pointing later on. Also, get input from subject matter specialists in
services the seller can charge for and how the charges will be made each service area (e.g., telecom, networks, help desk) as early as possible.
(unless these issues were already covered in the purchase agreement).
Defining clear charge-back rules in the TSA allows the tactical teams to
focus on delivering services without unnecessary debate.
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M&A IT — Divestiture
Notes
1
Garver, Rob. “Take a piece of me,” http://www.cfo.com/article.cfm/8909803?f=related, 2007.
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M&A IT — Divestiture
Breaking up is hard to do
Five questions for every CIO whose company is divesting a business
Introduction The sooner the CIO knows of any strategic shift caused by the
divestiture, the better — not only because it would affect choices made
In any large divestiture, some of the hardest jobs fall to the CIO: segregate
during the transition period, but because it would have significant
those corporate systems and services needed by the carved-out business;
after Day One impacts on resource requirements and utilization, on
untangle applications and infrastructure (some of which took years to put
investments, and on performance expectations and measurements.
together) in a few months; do it without disrupting service to the ongoing
business, while often holding or even cutting costs.
Tactical tips
Working with companies from every industry, we’ve seen the same
pattern again and again: CIOs end up with their feet in two fires, • After a carve-out, the company’s footprint will likely shrink
expected to provide service above and beyond what they’re used to for materially. IT needs to align or rationalize infrastructure, capacity,
not one, but two organizations. Support the parent company and the and applications to fit the new size and shape of the business.
divested business; be a profit center and operate on shoestring budget; • To perform the rightsizing analysis early in the planning process,
have a long-term strategic vision; and work at breakneck speed. No the CIO should engage the business in defining the nature of the
wonder “breaking up” can make the CIO feel a little like Dr. Jekyll and company’s new business model.
Mr. Hyde.
• Rightshoring/offshoring options need to be evaluated with the
Can anything relieve this pressure? Yes. intent of both reducing the in-house performance of noncore
activities and increasing leverage of core activities kept in-house.
First, the CIO’s office should be included on the deal team. The
expectations put on the Information Technology (IT) organization
escalate when Transition Services Agreements (TSA) for the deal 2. Should we move the divested business, as fast as possible,
are coined. When the CIO is part of the discussion (What can the IT from limited to complete separation?
organization reasonably accomplish with current resources? What
should the TSA promise? How long should it be in place? What are One secret to an effective divestiture is keep the end in mind: What
appropriate rewards/punishments for meeting/missing this timetable?), is the immediate and eventual relationship between the seller and
they can influence the outcome. the divested business? For the CIO, the ultimate goal is nearly always
complete separation (isolation) of the two entities with the timeline
Second, in planning for the divestiture, the CIO can ask five critical being the variable aspect. It is usually in the seller’s best interests to
questions — questions that help frame the IT organization’s work, support the carved-out business for a while, until the buyer is fully
rationalize its use of resources, and direct everyone’s efforts toward a equipped to operate the business. If the seller takes its hands off the
directed conclusion. carved-out business too soon and the business fails, shareholders will
1. Will the divestiture change the nature of the business and, blame the seller.
therefore, the purpose of IT? What’s important is a direction for going forward. How will the seller’s
Sometimes, the carving out of a business can change the obligations change over time (Figure 1)? What do both businesses
fundamental strategic direction of the ongoing enterprise. In most expect from the IT organization at each stage? These expectations, as
cases, the strategic intent behind a divestiture is to realign or refocus well as performance metrics, have to be part of the TSA, which should
the business — to do away with noncore businesses and heighten align the goals of the two organizations.
the focus on core businesses. Therefore, the CIO needs to ask, “What
are the rightsizing implications?”
For example, a company that had been experimenting with innovation
— new products, new markets, or new technologies — might shift
gears, deciding to sell off its more aggressive operations and reinvigorate
its older, commodity products. The role of IT would radically change,
from developing cutting-edge solutions to providing low-cost services
for a low-margin business. (Of course, a company could use a divestiture
to move in the opposite direction. The impact on IT would likely be just
as dramatic.)
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While complete separation (isolation) is usually the ultimate goal Source: Deloitte Consulting LLP
for the IT organization, an interim “limited or logical” separation
is usually necessary when:
• The deal will close quickly (e.g., within three months). Observations
• Confidentiality of parent data/information is not critical. • In many cases, the quickest and highest impact synergies in IT are
decisions NOT to do something — canceling duplicate projects is
• The deal is still being developed and/or multiple buyers are quick and can have significant short-term cost savings
being considered.
• Once a common infrastructure standard is selected, implementing
• The parameters/scope of the deal will develop over time. consolidation is relatively quick — the key is making the decision on
• It’s important to minimize transition impacts to the divested business. standards quickly and early in the process
• The application landscape will likely not change significantly. • Application consolidation and legacy system retirement are the hardest and
most time consuming to integrate, but offer “by far” the highest value
For each process or application, IT needs a Day One strategy,
an interim strategy, and an exit strategy. The IT organization’s • Standardized technology and business processes are a fundamental
position on the spectrum (which changes over time) can affect how enabler for IT integration
data/information is managed, what reports are maintained and • Forward-thinking IT organization have performance-driven cultures
generated, and the type and level of service provided. and a strong focus on continuous improvement. Metrics should be
balanced, promote accountability, and effectively reflect the status
One of the CIO’s particular challenges is resource availability and
of the IT organization
utilization, especially if either business (the original or the divested)
is undertaking a major project, such as a systems upgrade,
installation, or integration at the same time. Another consideration:
the CIO’s operating budget. Sometimes, the speed with which the
IT organization can move from the far left to the far right of the
continuum depends on financial constraints and synergy targets.
If the CIO has to cut the budget by 10 percent in six months, that
automatically impacts the timetable for achieving isolation.
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M&A IT — Divestiture
Give and go Buyer is operational Day One with a system that Deal will involve personnel seller will no longer Low High
Hand off production system to buyer is familiar; users are comfortable; seller costs have access to historical data; potentially
drop immediately sensitive data will be left in the system
Hybrid Overall risk is better managed; more options to Requires detailed planning early on for each Medium Medium
Choose different techniques for different effectively get to day on suite; business participation is increased
application suites
Source: Deloitte Consulting LLP
Tactical tips
• Very early in the process, the CIO needs a detailed analysis
of skills required for achieving the desired outcome (not just
technical skills, but interpersonal skills) and the names of the
people with these skills. Are the right people available inside
the company? Will the IT organization have these skills after
the carve-out? Also, the CIO will want to determine a mix of
full-time equivalent and external resources right for the future
operating model.
• The CIO should establish a separate contract approval process
for HR retention bonuses. Innovative retention techniques can
also include new job descriptions, roles, and responsibilities.
In fact, an emotional appeal is typically more effective than a
financial incentive.
• Clear and consistent communication can help reduce the number
of critical employees that leave during the transition period, can
foster commitment to the change and the new organization,
and can build support and trust. Town hall meetings are a
good, open format for communicating decisions that have
been made (and not made), including timelines. The CIO should
communication widely and often; interactive decision-making is
highly encouraged.
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M&A IT — Divestiture
77
Appendix
Appendix
80
Appendix
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Wired for winning?
Rod Walker
Rod is a Senior Manager in the Technology Integration Service Area
of Deloitte Consulting LLP, focusing on M&A IT related services.
His experience includes providing services involving due diligence,
integration, IT restructuring efforts, and M&A IT capability development
across a variety of industries including consumer & industrial products,
media and entertainment, and energy.
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Appendix
Strategy. With a well-crafted growth strategy in hand, management Synergies and value capture. Capturing synergies (both cost and
is better prepared to recognize possible mergers, acquisitions, or revenue) is usually the driving force behind the decision to merge two
divestitures that could move the company toward its goals. Plus, we can companies. The integration team works toward fulfilling these promises
help put in place the organizational structure and support needed to act by identifying functional and operational areas where costs can be
efficiently and effectively. reduced. It also assesses market revenue opportunities to capture the
deal’s value by evaluating customer, market, and product synergies.
Target screening. Chasing unqualified acquisition prospects wastes
valuable time and resources. A structured screening process can help a Customers, markets and products. Protecting and growing core
company define the acquisition criteria upfront, create a pool of target business revenues are vital to capturing value. During planning, the
candidates and focus on prospects that match its strategic objectives. integration team conducts in-depth studies of customers, markets and
products and makes recommendations to executive management for
Due diligence. It pays to dig deep to uncover an acquisition target’s
integration or divestiture. To excel, the team must manage the change so
true value and risk before the offer is made. Scrutinizing financial
that business continues as usual — or improves — during the transition.
statements and understanding tax implications is just the beginning.
There’s also commercial diligence work required to evaluate the Organization and workforce. Headcount reduction is a common
potential impact on customers, markets and operations. Key back office target for lowering costs, but it’s equally important to retain top talent.
areas, such as human capital, information technology and supply chain, Creating the new organization chart requires deft handling to satisfy
demand special attention. practical and political concerns.
Transaction execution. With the deal structure and valuation finalized, 360° Communications. Timely and clear communication among all
it’s time to close the deal. Sound financial, tax, accounting and legal the stakeholders is critical. The integration team facilitates top-down
advice can go a long way toward helping fulfill goals and avoid and bottom-up communications among executive management,
unnecessary risks. shareholders, employees and customers of both companies.
Integration. Few operational challenges are more daunting than Finance, human capital, supply chain, and information technology
merger integration. It’s a balancing act that requires close attention to integration. Delivering on the synergy targets requires drilling down
meeting the expectations of all stakeholders – management, employees, into each functional area, searching for opportunities to capture value.
customers and shareholders. In an ideal world, integration planning Ideally, an outside functional specialist is assigned to each key area, such
begins well before the deal closes to facilitate an issue-free Day One for as finance, human capital, supply chain and information technology.
the combined company. Also, a team leader with an objective outlook and broad experience
working with many companies can see opportunities that someone with
Divestiture. Divestitures are not just mergers in reverse. Achieving
less experience may miss.
the expected results is highly dependent on maintaining operational
excellence while managing potential conflicts between the time of the Location and facilities. Strategic decisions, and often negotiations,
announcement and the final execution of the divestiture. are required when mergers result in overlapping locations and facilities.
Some sensitive decisions, such as selecting a merged company’s
Comprehensive M&A planning and execution
headquarters, require evaluating softer qualitative factors alongside the
During an M&A integration or divestiture, the qualities we bring — hard numbers.
knowledge, speed, objectivity, and experience — help our clients achieve
a smooth transition.
Integration and divestiture management. During planning and
execution, the integration team keeps the project on track by moving
the decision-making process forward and coordinating integration
activities across both organizations. The team also expedites and
monitors progress toward each milestone from the time the deal is
announced until all the integration or separation goals are achieved.
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Integration
diligence
strategy
Target
M&A
Due
360˚ Communication
Functional integration
84
Appendix
1 2 3 1 2 3 4
IT IT IT supplier IT IT IT IT supplier
infrastructure applications management PMO infrastructure applications maintenance
Plan, conduct Plan, conduct Plan, conduct Plan and Develop and Develop plan Create and
and finalize IT and finalize IT and finalize establish PMO implement and execute implement
infrastructure applications due IT supplier structure and plan for IT activities related overall sourcing
due diligence diligence management activities for IT infrastructure, to IT applications and procurement
due diligence detailing tasks, plan
activities,
resources, and
cost figures
Note: The M&A IT methodology is specifically designed to help address the challenges of the IT function during due diligence, integration or divestiture.
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86
Related reading: Wired for winning is the second compendium of
articles in Deloitte’s Making the deal work series. For a broader look
at M&A issues, check out Making the deal work – Perspectives on
driving merger and acquisition value.
Coming soon: The next two installments of Making the deal work
focus on Human Capital and Finance issues in M&A.
Find Wired for Winning – and links to all Deloitte M&A related
materials — at www.deloitte.com/us/makingthedealwork.
Talk to us: We look forward to hearing from you and learning what
you think about the ideas presented in this compendium. Please
contact us at Makingthedealwork@deloitte.com.
This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this
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