Post-merger IT integration
October 2014 | TALKINGPOINT | MERGERS & ACQUISITIONS
financierworldwide.com
FW moderates a discussion on post-merger IT integration between Erika Schraner, a partner at PwC, and Aaron Huykman, a director at PwC.
FW: To what extent can poorly integrated IT systems be considered a major cause of mergers that fail to generate expected returns? How often do you see this occur?
Schraner: PwC recently surveyed over 100 senior executives at Fortune 1000 companies on M&A integration trends and successes. We found that 65 percent of respondents characterised their M&As as being significantly successful from a strategic standpoint, only 49 percent reported significant success in achieving financial goals, and only 35 percent reported significant success in realising their operational goals. Strategic goals can often be achieved by ‘doing the deal’, and financial goals, while more elusive, are often focused on realising shorter term synergies. But long term sustainable deal value comes from achieving operational goals which in my experience are always underpinned by a significant IT integration.
FW: What particular considerations need to be made in terms of deciding whether to merge the target’s systems into the acquirer’s, the acquirer’s into the target’s, or to create a new IT system entirely?
Schraner: This needs to be looked at in the context of overall deal thesis, the deal type and the integration strategy. A transformation deal will require a very different approach from a business and IT standpoint, than a small tuck-in acquisition.
Huykman: That’s right. Other key considerations include the associated benefits of the options from a cost and risk perspective, fitness for purpose of existing systems, and alignment of IT strategy to business strategy.
Schraner: Sometimes an acquisition creates a catalyst to get rid of an outdated or no longer fit for purpose IT system. I have seen a few cases where companies have moved to a completely different CRM system, for example.
“Long term sustainable deal value comes from achieving operational goals which in my experience are always underpinned by a significant IT integration. ”
FW: Could you outline the key benefits of a well planned and executed IT integration effort?
Huykman: IT is at core a business process enabler and therefore a key dependency on realising the deal benefits. This often gets overlooked, with IT being considered purely as a cost centre. As a result, IT investment or change required to achieve integration success are missed. When done right, the benefits are therefore achievement of integration operational and performance objectives within anticipated cost, timeframe and scope.
FW: Are you seeing a greater emphasis on IT integration planning during the due diligence phase of a pending transaction? Is this prevalent mainly in technology-related sectors, or is the trend spreading to other industries as well?
Huykman: IT is fast becoming a key standard part of the due diligence phase as businesses increasingly understand the potential adverse impact on performance and reputation when it goes wrong, and this appears to be an industry wide development. However, diligence scope is often reduced to considering IT in isolation of interdependencies with other business functions, which is often a cause of delays or unexpected investment post deal to achieve anticipated integration benefits.
FW: What steps can acquirers take to ensure they carry out a robust IT integration process? Are any particular areas indispensable? What aspects are frequently underestimated or overlooked?
Schraner: Today’s integrations have become increasingly complex as companies are doing more transformational deals to enter new markets, channels, products or operations. The key is to design upfront the holistic target operating model for the combined company, including IT. This means answering the tough questions of where you integrate, where you transform and what you leave alone. You also want to determine to what degree, at what speed and in what priority you realise the answers across people, processes, IT and the value chain. Companies need to be prepared to commit resources and capital over the long term. The deal business case to the investment committee should include these considerations.
FW: In today’s business world, data privacy and security breaches regularly make headlines. How should parties approach these issues during IT integration?
Huykman: IT integration can often increase the risk of breaches as data is transferred between systems as part of the integration projects. However, at core, the approach should be no different to business as usual protection measures. In most businesses, protection can usually be achieved relatively simply and cost effectively and is an area that can be identified during diligence and addressed as a priority post deal. For example, diligence should include a review of information security policies against best practice, policy compliance, utilisation of independent penetration test services, and capability of internal IT security resources. The emergence of cloud based IT systems, which are often evaluated as part of an integration solution roadmap, has raised the levels of risk consideration as data transfer volume and distance increase. Implementing robust protection measures is vital, especially where the cloud is operated and managed by a third party or used to support international business processes.
“IT is fast becoming a key standard part of the due diligence phase as businesses increasingly understand the potential adverse impact on performance and reputation when it goes wrong.”
FW: If one or both companies outsource particular IT processes, what additional considerations need to be made?
Huykman: Key considerations are the contractual arrangements and relationship status with the outsourcer and also the fitness for purpose of the existing services. These factors will significantly impact the pace, cost and ability to implement change, influence IT strategy, and could become accelerators or barriers to achieving integration objectives.
Schraner: I have seen many cases where large corporations acquiring smaller businesses will take the target’s outsourced IT processes back in-house because they have the scale to manage it better and more cost effectively internally. On the other hand, large transactions offer a unique opportunity to negotiate more favourable arrangements with outsourced providers.
FW: How important is it to establish a dedicated team and assign particular roles and responsibilities to overseeing the IT transition?
Schraner: Most companies making acquisitions are not standing still and have internal processes and IT improvement plans. Having cut back IT investment during the recession, they are now catching up. This can commonly result in major IT projects such as ERP developments or insourcing/outsourcing some parts of their IT and business processes. It is critical to have a dedicated IT integration team who can focus on diligence, define the IT integration strategy, assess trade-offs between IT integration and other ongoing IT programs and, most importantly, can interface effectively with the rest of the business. A key role is an IT integration leader within the acquirer who not only understands the IT issues but is an executive with outstanding relationships with other leaders across the business and is able to rally the organisation to take the best decisions on such trade-offs. Whether part of the IT integration team is filled by IT integration consultants or internal staff will depend on bandwidth and capabilities.
FW: We have spoken a lot about corporate deals here. How is the process different for private equity firms?
Schraner: The deal rationale differs significantly between corporates and private equity firms. Usually the rationale is strategic and long term for the former, and return based and short term – at around 3-5 years – for the latter. Private equity will focus IT investment in replacing IT capability in carve-out acquisitions and accelerating value creation in the near term. Larger private equity firms will also look at optimising IT investments across their portfolio.
Huykman: As an example, IT telecommunication service providers can be rationalised across a portfolio to enable volume synergies to be achieved. Contracts can be structured so that penalties are not incurred on exit. Further, an arrangement can be agreed with the provider to implement a standalone contract from Day One with the asset being divested.
FW: What final advice can you offer to acquirers on ensuring they get post-merger IT integration right?
Huykman: My advice would be to remember that IT exists to enable the business. If it doesn’t, then something is wrong in the business model. Recognising this, and utilising appropriately skilled IT people who align to that thinking, will mitigate most of the common pitfalls we have discussed.
Schraner: Bring IT to the forefront of the deal business case, due diligence and integration. There will be trade-offs between investing in the integration and other business initiatives. Failure to address this head-on will lead, several acquisitions later, to a plethora of IT systems that ultimately will undermine profitable growth.
Dr Erika Schraner is a partner at PwC in London heading M&A Integration services. She also leads PwC’s Delivering Deals Value practice for the TMT sector. She has more than 20 years of advisory and corporate experience in M&A integration, carve-out readiness and execution, synergy development and realisation, operational and IT due diligence and operating and IT model design and implementation. Dr Schraner specialises in advising clients on complex deals and cross-border transactions. She can be contacted on +44 (0)7738 845 284 or by email: erika.schraner@uk.pwc.com.
Aaron Huykman is a director in PwC’s Deal Value Team, with over 22 years of industry, consulting, and transactions experience. He is a seasoned IT manager with extensive experience in managing due diligence and post deal operations across a variety of sectors and geographies. His transactions experience include pre deal buy and sell side due diligence, separation and integration planning, TSA and SPA design, synergy reviews, post deal separation and integration management, TSA and SPA operation. He can be contacted on +44(0)7711 562 082 or by email: aaron.j.huykman@uk.pwc.com.
© Financier Worldwide