More than one-third of mergers & acquisitions (M&A) activities fall short of expectations in terms of success (around 35% according to infas institute Germany). This is not only an IT issue, but often the potentials as well as the risks are assessed superficially or incorrectly during the subsequent integration. On average, the area of IT accounts for 20% to 30% of the expected total benefits of a merger or during integration. Navisco has supported clients in their M&A projects from an IT perspective, both in due diligence and in the later integration. From our point of view, this field report shows essential aspects for IT management and the realization of success potentials in M&A projects.
M&A strategy
A corporate transaction is initially based on an appropriate M&A strategy for the specific opportunity, in which the objectives are defined and which serves as the basis for all subsequent activities. The two key aspects here from the IT perspective are “synergies” and “continuity management”.
IT synergies are mostly considered in the strategy, since they play a significant role in the business case considerations, but early concrete implementation planning is also crucial. If this is lacking, delays in implementation are inevitable and thus jeopardize the financial success of the acquisition or merger.
IT continuity management is usually seen as a given in the strategy and is not explicitly considered. However, this aspect is particularly important as soon as a company leaves a previous corporate group as part of the corporate transaction. In general, concrete implementation planning is required here, which must already be included in the contract negotiations for the corporate transaction (e.g., continuation by external service providers and corresponding contracts or agreements with the seller’s internal IT organization).
Due Diligence
Due diligence, the collection and evaluation of the current status and the verification of assumptions, plays a significant role in a transaction. In due diligence, all risks are identified and quantified, if possible, and their remediation or alignment is planned and budgeted for. It is necessary that the IT area is also considered here with the necessary expertise, as this can result in considerable risks. This is not so much a complete survey of IT assets and services, but rather a financial assessment of IT and the potential for integration or continuation. Attention must also be paid to horizontal levels such as IT security and compliance. Does a new part of the company bring with it new requirements that need to be integrated into the existing IT environment? For example, continuity planning assumptions or value propositions for customized IT solutions need to be evaluated.
From our experience, the quality of the results influences the purchase negotiations and directly or indirectly the purchase or sales price. On the other hand, the results lead to the verification or synergies and continuity management from an IT perspective. Experience is required in due diligence with regard to the scope and depth of detail as well as the methodological approach.
IT synergies and potentials
The degree of standardization and harmonization plays an important role in the realization of synergies. Basically, it can be said that “the closer an IT environment is to the standard, the easier it is to migrate from or to another environment”. Accordingly, so-called legacy systems are usually much more difficult to migrate than comparable standard ERP systems. The analysis and the necessary redesign of the business processes can be the most difficult factor to evaluate, since the IT potential depends to a large extent on the standardization of the business processes. Special attention should be paid to this part, because it requires a time lead. Usually, especially in this area, long discussions among the affected departments are to be expected. Only simulations with suitable tools, which provide a certain indication of time and costs at the end, provide the necessary basis for decision-making.
In addition to reducing the number and complexity of applications, the greatest and best-known potentials include standardizing the usually different technical architectures, server landscapes, and service processes and data centers. Here, the synergies and procedures from market-tested IT outsourcing projects can be transferred one-to-one.
Skillful license management can generate savings in software licenses and their maintenance. In the purchase/sales phase, it is generally important to ensure that a clear delimitation of licenses is made for all software products used. Not every license can be legally transferred with the company. In this context, centralization is also an effective means of saving costs.
Thanks to the erosion of communication costs in recent years and the increased availability of lines, technical solutions have become possible that would not have been worthwhile a few years ago. Shared environments and the virtualization of servers and applications are further magic words of modern IT. As a rule, dedicated hardware is no longer purchased, but only the required resources are allocated to the individual applications or the respective service in a flexible and expandable computing environment. This applies to CPU performance as well as RAM memory, storage and also to the topics of backup and restore, as well as disaster recovery in the extended sense. This is an interesting approach, particularly with regard to an existing or possible outsourcing of IT to a professional service provider, as the service provider usually already has such an environment.
Comparable references and assessments are available on the market for estimating IT synergies, but these should be checked with regard to the underlying delivery model for implementation risks in the M&A project before the contract is signed.
Post-merger integration
While a corporate transaction from a commercial and legal perspective is usually based on a key date and the most important course is set in the first 100 days thereafter, from an IT perspective it is a post-merger process that often lasts longer than a year. The “Current Mode of Operation” (CMO) of the companies or parts of the company involved must be transformed into a joint “Future Mode of Operation” (FMO) (Transition & Transformation). Since functioning IT is usually regarded as business-critical, continuity management is of central importance during the Transition & Transformation (T&T) phase up to FMO. T&T must therefore already be taken into account contractually by guaranteeing generous transition and transition periods for certain IT services. Prior to a corporate transaction, all pending investments and projects are usually frozen and then evaluated in detail at the start of T&T and realigned in the direction of FMO. An assessment of the pending technical as well as business unit projects and the investment requirements for the continuation of IT operations is of central importance.
In addition to the necessary technical and organizational knowledge, the actual implementation of T&T requires a high degree of experience and goal orientation. Professional project management and adherence to the integration timeframe are key challenges in a complex set of business requirements, investments and technical developments. In our view, success is highest in a mix of external expertise and internal knowledge. In any case, the view that the existing CIO, for example, will manage this with a little extra effort in his team clearly jeopardizes success.
Ultimately, integration means implementing the FMO of the IT landscape in detail. At this point, at the latest, the governance model must be established. How is it measured and reported, how do the escalation processes work between the service provider and the service recipient? How do the opportunity processes work? ITIL V.3 has made some specifications here and has established itself as a standard. However, this only states what must be done, but how it is to be implemented in individual cases requires joint development.
Conclusion
Successful M&A projects require an early consideration of IT and the consideration of requirements throughout the process. IT aspects are rarely the subject of detailed analyses in advance, but their insufficient consideration is often the reason why success ultimately falls short of expectations.
Just as external legal and business expertise is almost invariably used in M&A projects, the early involvement of an external consulting firm with specialized know-how and best practices for IT assessment compared to the market and transformation experience, such as in IT outsourcing, should also mean significant added value.
