Paul Robinson, founder and CEO of Ensunet Technology Group in San Diego, makes his living helping acquirers integrate complicated IT systems. Trouble is, he said, buyers don't often ring him soon enough.
"Usually we get the call after the toothpaste has been squeezed out of the tube," Robinson said. "They are in the middle of their integration, and it's not going well."
Post-merger integration has never been easy, but today’s mergers-and-acquisitions activity is riddled with complications that once didn't exist. Buyers not only must focus on valuation and projected synergies during the due-diligence phase, but they also need to evaluate a seller's digital capabilities, IT infrastructure, security protocols, quality-control processes, and licensing and contracts, to name a few technology requirements. Then they must determine if and how they can integrate another system with their own, and ensure they have sufficient staff and resources necessary to support this endeavour.
But what frequently happens, Robinson noted, is that buyers treat IT as an afterthought, and as a result, the 100-day integration road map takes at least a year. "Suddenly, the value erosion has taken place," he said.
What's more, top management of the acquiring companies may view IT as a support function rather than as an enabler to help realise synergies and growth. In other words, they downplay the importance of IT in the M&A process, a mistake since digital progression is vital to generating efficiencies and achieving financial targets and revenue growth. "IT/digital is becoming an important cost component in M&A scenarios," noted Ashish Madan, partner, CIO advisory-digital strategy at KPMG in Frankfurt, Germany.
To avoid losing expected deal value, finance leaders and their respective companies must take numerous steps involving IT, from due diligence through post-merger integration. Robinson, Madan, and other M&A IT experts outline four key considerations for buyers to follow:
Involve IT leaders early. "The CIO is, unfortunately, not always at the table at the beginning of the M&A process," said Deloitte's Marcus Pankow, Ph.D., director of IT M&A in Munich, Germany. But it's important, he noted, to evaluate in due diligence the target's digital capabilities, applications, the data supporting the processes, and the infrastructure to estimate the deal’s value, required integration effort, and achievable synergies.
"Buyers want to include their IT professionals early in the M&A processes to incorporate their own organisation's technological capabilities and digital maturity in evaluating and planning for the desired target picture," he said.
Also, noted Madan, involve all IT employees from the beginning of the M&A process, so that they are ready on day one after the deal is closed. "It is important to have a solid IT house before initiating [a transaction], because this way you can leapfrog in the project," he said.
Pay attention to people. Buyers get into trouble when they don't address key personnel issues early. For starters, "One of the things that's missed is that IT departments across the world are already spending 50 to 60 hours a week keeping the operational lights on," Robinson said. "Who will have the expertise to exercise on the due diligence and integration?" So make sure your IT department has enough personnel and resources to not only keep the business humming, but to handle post-merger integration as swiftly as possible.
Also, be mindful of your current and soon-to-be newly acquired employees, many of whom will be confused as to the new workplace landscape.
"People are upset not about their job loss or that you'll give them doughnuts versus bagels — but that you will make them use Excel versus PowerPoint documents," said Amsterdam-based Jon Crockett, vice-president, transaction services, at global consulting firm Pritchett LP. "You must have a plan in place to manage change."
If you don't, you will possibly lose newly acquired IT employees who have "the tribal knowledge and understand the business processes and what makes up the secret sauce of that [acquired] corporation", Robinson noted. "If they leave, you have major, major issues.”
Get your own IT house in order. Before post-merger integration begins, take an in-depth look at your current IT team, and assess what resources IT employees have available to take on the additional workload that comes with post-merger integration. "When there are substantive gaps with internal M&A capabilities and experience, which require capital investment, then certainly finance should be aware of it," Robinson said.
"Digital transformation should be core to any company's target picture and significantly affects deal value," Pankow said.
Conduct a thorough IT due diligence. Without proper planning and review of the target's IT systems, countless problems can surface post-deal, upsetting clients, employees, and the bottom line. A comprehensive IT due diligence must be conducted before close. "The primary objective other than the valuation and getting the pricing right is to avoid disruption in the business," Crockett said.
Pritchett helps companies with M&A integration, change management, and corporate culture issues. The firm outlined the following questions, among others, that should be asked before closing: Who will manage the consolidation and the employee on-boarding, including accounts and access? Who on your team will manage the preparation, testing, and migration of all systems and tools into a single consolidated environment? Have you created a budget for the merging of these systems?
It's especially vital to have IT evaluate the seller's cloud usage, advised Madan. "Digital and cloud is opening new doors for cyberthreats, which is ultimately a business risk, reputational risk, and data-leakage risk," he said. "IT due diligence is becoming as crucial as financial due diligence."
— Cheryl Meyer is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.